Increasing regulatory attention on the insurance sector in Britain will likely be a negative for industry profitability, Fitch Ratings says.
In a new report, the rating agency notes that the United Kingdom insurance industry is facing increased regulatory scrutiny. Recently, Bank of England governor, Mark Carney, announced a plan to introduce accountability rules for senior insurance industry executives, which Fitch says underlines its’ view that “the UK has stepped up its regulatory focus on the sector, adding to the risk of further potentially disruptive reform.”
While it is too early to assess the impact of new accountability rules, Fitch says that they will probably increase the overall regulatory burden. “There could also be a negative impact if they deter people from accepting senior insurance roles, or benefits if they result in closer scrutiny of risk by senior managers,” it says.
Other recent regulatory and legislative changes are more clearly negative for profitability, Fitch says, including the scrapping of rules requiring retirees to buy an annuity, the introduction of a cap on charges for pension auto-enrolment default funds, and a Financial Conduct Authority (FCA) investigation into whether insurers are managing business in closed funds in customers’ best interests.
“The combined effects of these changes will put increased strain on profitability, which is already a relative weakness for the UK life sector. This is because insurance companies are competing for business in a highly regulated, saturated market, while low interest rates are pushing investment returns down,” it says, adding that UK life insurers’ capital positions remain strong.
Regulatory reform could also put pressure on profitability in the non-life sector, Fitch says, but the impact is likely to be more mixed.