Opportunities require wise risk and regulatory management
Financing growth is a primary objective and a key driver of policy and reform agendas for both the United Kingdom Government and the European Commission for 2025 and beyond. One of HM Treasury’s stated objectives of the Solvency UK (SUK) reforms is to allow life insurers to invest in a wider range of “productive” assets that could finance UK economic growth.1 At the same time, and notwithstanding their secondary competitiveness and growth objectives, regulators need to give primacy to their financial soundness and policyholder protection objectives. In the UK, this interplay has resulted in one of the busiest agendas for life insurers on record since the implementation of Solvency II.
Figure 1: volume of bulk purchase annuities transactions since 2020 in GBP bn
Source: reports from Reuters and The Pension Age and Professional Pensions2
The changes in train are not dominated by a single regulatory file; instead life insurers, especially those in the bulk purchase annuity (BPA) market, are:
This is a daunting homework list but four factors make it even more challenging than it might first appear:
Figure 2: life insurers should tackle regulatory requirements in the round
The defined contribution (DC) pensions market will also undergo material changes in the year ahead. The Government is set to complete its Pensions Investment Review and publish a Pensions Bill in the first half of this year focusing on consolidation of pension schemes.4 Even in the absence of these changes, the DC market is set to grow significantly over the next few years, putting it at the centre of attention for life insurers, regulators and Government. It is expected that assets under management in DC pension pots will reach GBP 800 bn by 2030.5 In the past year, both the current UK Government and European Commission reports have proposed that insurance investment in key areas of the economy should be a key component of enabling much needed economic growth and a way of financing the green transition.6,7
In parallel, under the Consumer Duty (the Duty) in the UK, insurers must deliver good outcomes for consumers and enable them to pursue their financial objectives. In the DC market, making good on these principles can be particularly challenging due to the complexity and long-term nature of pension products, low levels of customer engagement and financial literacy and limited take-up of advice. Insurers will need to be very careful when balancing the pressures to invest in certain types of assets against delivering good outcomes and value for money for policyholders.8 These two forces may sometimes align but life insurers should build the systems and controls to identify when they do not. Insurers should ensure they inform policyholders of any risks associated with investments to avoid foreseeable harm.
The FCA has been working on solutions to improve retirement and retail investment outcomes for more than a year now through the Advice Guidance boundary review. Late in 2024 the FCA consulted without rules on proposals in the retirement market centred around developing a targeted support model. 2025 will be a crucial year in the development of targeted support with a consultation with draft rules expected in H1 2025.
Finally, since August 2024 firms have been fully under the scope of the Duty and are ready and willing to move Duty compliance into business as usual. However, we expect the FCA to focus on Duty implementation in the life insurance sector. As an example, over the last year the FCA applied intense scrutiny to the GI sector with interventions including thematic reviews and skilled persons reports focusing on evidencing customer outcomes and compliance with product oversight and governance rules.
In the case of life insurers, we think it is likely that the treatment of vulnerable customers9 and closed product portfolios will attract supervisory attention in the year ahead. Many life insurers are still grappling with the sheer volume of products and their variants subject to the Duty,10 resulting in real operational challenges. To solve this problem, some firms have embarked on substantial product simplification programmes that are still ongoing due to the complex nature of the implementation required. Prioritising the ongoing work on closed product portfolios is a must. It is also crucial that any decisions regarding difficult to reach customers should demonstrate the firm is acting fairly.
Firms should also apply the lessons from their work on closed products to the design of current and new products. The emphasis of the Duty on designing products that meet the changing needs of customers is pointing towards offering a range of products and options, but too much variety may come back to bite firms further down the track. Designing products that firms can review regularly and portfolios that they can easily consolidate is key for firms that want to future proof their portfolio in a Duty environment.
The year ahead will bring a heady mix of risks and opportunities to the life insurance sector. Implementing regulatory change such as SUK, LIST 2025 and Funded Re rules will be top of the BPA market agenda. The Duty journey is not yet over either, with the FCA likely to challenge firms in relation to closed products and their treatment of vulnerable customers. Boards should consider if their firm has sufficient resources of the right calibre to meet regulatory expectations. Of equal importance will be for firms to assess the opportunities brought on by regulatory change, be it the ability to invest in a wider range of assets, the implications of pension reform or the review of the Advice Guidance boundary opening the doors to a new advice model. Both the DC and BPA markets are set to grow significantly over the next five years; this means that setting the right regulatory strategy can play a big role in making a success of the opportunities ahead.
Key considerations for life insurers
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