Skip to main content

Life insurance

Opportunities require wise risk and regulatory management

Back to Regulatory Outlook 2025

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.
 

A daunting implementation agenda for bulk purchase annuity (BPA) firms
 

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:

  • Continuing the implementation of SUK reforms including exploring expanding the range of assets that could be eligible for inclusion in the Matching Adjustment (MA) portfolio.
  • Preparing to submit the first MA attestation to the Prudential Regulation Authority (PRA).
  • Preparing to implement the new PRA’s liquidity reporting framework.
  • Grappling with new expectations on funded reinsurance (Funded Re) arrangements.
  • Running the PRA’s life insurance stress test 2025 (LIST25). This will include individual firms’ results being published towards the end of this year.

This is a daunting homework list but four factors make it even more challenging than it might first appear:

  • First, all initiatives are deeply interconnected and will require use of similar resources in actuarial, financial risk and modelling functions. For example, as part of SUK implementation, firms might choose to submit MA applications for assets with highly predictable cashflows. These in turn will need to be carefully reflected in the MA attestation and in the stress testing exercise. Similarly, Funded Re and reinsurance re-capture scenarios that are part of LIST25 are also connected. This means that insurers and their boards need to understand the cumulative operational impact of these changes and ensure they will have enough resources through the year to meet the deadlines.
  • Second, we expect demand for BPA transactions to remain high this year resulting in several new entrants to the sector. We are also seeing higher year-on-year individual annuity sales in the open market (the Financial Conduct Authority (FCA) reported 39% increase in the number of annuity policies sold to the end of March 2024)3 requiring more capital or reinsurance together with greater operational capacity to absorb the supply. This is likely to put increased competitive pressure on BPA incumbents. 
  • Third, the increased investment flexibility brought in by SUK reform remains largely untested. Our view is that, in this very competitive market, firms will need better asset origination expertise to unlock the potential of the reforms and protect or increase their commercial success. Final Basel III banking rules could be a catalyst here. UK and EU banks are seeing some portfolios becoming more capital intensive as the new rules land, and risk transfers of these portfolios are likely to be part of their response. It remains to be seen whether the conditions are right for such supply to find demand in the life insurance sector. But banks and life insurers alike should be asking themselves this question.
  • Last, we expect risk functions to find the year ahead particularly challenging. Risk teams sit right at the centre of the tension between managing risk and meeting commercial objectives. The best risk teams will be able to demonstrate to the PRA that they have the right frameworks, expertise and models to manage the risks of this complex business. We are of the view that investing in building and maintaining a robust and effective risk function could be the key to continued commercial success in the market.

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
 

Consumer protection challenges persist
 

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.


Conclusion
 

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
 

  • Assess inter-connectedness of work to implement Funded Re/SUK and stress testing to ensure enough resources/time are available.
  • Review the impact of new regulatory requirements on the firm’s capacity to complete new deals and compete in the BPA market.
  • Empower risk teams to ensure they can provide the necessary challenge to the business and demonstrate to the PRA high quality risk management.
  • Dedicate appropriate resource to finalise Duty programmes, especially in relation to closed products and the treatment of vulnerable customers.
  • Review current product development and design practices in light of lessons from Duty implementation: designing for change and adaptability is a must.

  1. The Chancellor’s Mansion House 2024 speech stated “the PRA, the Treasury and the National Wealth Fund will work together to crowd in investment by insurers in productive assets taking full advantage of the new Solvency UK regulatory regime” – source: UK Government, Mansion House 2024 Speech, available at: https://www.gov.uk/government/speeches/mansion-house-2024-speech

  2. Reuters, British pension insurance deals total $56 bln in 2024, report says, January 2025, available at: https://www.reuters.com/business/finance/british-pension-insurance-deals-total-56-bln-2024-report-says-2025-01-02/ ; Pension Age, 2023 on track for record BPA activity; superfunds could ease capacity crunch concerns, August 2023, available at: https://www.pensionsage.com/pa/record-breaking-h1-2023-in-bulk-annuity-markets.php ; Pension Age, over £25bn of bulk annuity deals completed in the UK in 2022, February 2023, available at: https://www.pensionsage.com/pa/Over-25bn-of-bulk-annuity-deals-completed-in-the-UK-in-2022.php ;  Professional Pension, L&G takes BPA top spot as insurers report 2022 results, March 2023, available at: https://www.professionalpensions.com/news/4087003/takes-bpa-spot-insurers-report-2022-results; Professional Pension, The risk reduction market: A review of the activity in 2021, March 2022, available at: https://www.professionalpensions.com/news/4046617/risk-reduction-market-review-activity-2021.

  3. FCA, Retirement income market data 2023/24, September 2024, available at: https://www.fca.org.uk/data/retirement-income-market-data-2023-24

  4. UK Government, Pensions Investment Review: interim report, November 2024, https://www.gov.uk/government/publications/pensions-investment-review-interim-report

  5. Pensions Policy Institute, THE DC FUTURE BOOK 2024, September 2024, available at: https://www.pensionspolicyinstitute.org.uk/media/hbrgvfw5/20240926-the-dc-future-book-2024-final.pdf

  6. UK Government, Financial Services Growth & Competitiveness Strategy Call for Evidence, November 2024, available at: https://assets.publishing.service.gov.uk/media/6735f4670b168c11ea82311d/Financial_Services_Growth___Competitveness_Strategy_-_Call_for_Evidence_.pdf

  7. Enrico Letta, Much more than a market, April 2024, available at: https://www.consilium.europa.eu/media/ny3j24sm/much-more-than-a-market-report-by-enrico-letta.pdf

  8. FCA, CP24/16 The Value for Money Framework, August 2024, available at: https://www.fca.org.uk/publication/consultation/cp24-16.pdf

  9. In late 2024, the FCA published the findings of its review of life insurers bereavement claims processes highlighting there is a lot of work for life insurers to do to ensure these processes deliver good customer outcomes – source: FCA, Findings of our multi-firm review of life insurers' bereavement claim process, November 2024, available at: https://www.fca.org.uk/publications/multi-firm-reviews/findings-our-multi-firm-review-life-insurers-bereavement-claim-process

  10. FCA, Dear CEO letter: Implementing the Consumer Duty for closed products and services – life insurance, May 2024, available at: https://www.fca.org.uk/publication/correspondence/dear-ceo-letter-implementing-consumer-duty-closed-products-services-life-insurance.pdf

Did you find this useful?

Thanks for your feedback