Last weeks Budget will reduce both sales and margins for UK life insurers, according to a Moodys
The ratings agency's report on changes in the pension system and credit implications for UK life insurers revealed that Chancellor George Osborne's decision to abolish the requirement to buy an annuity would have a 'credit negative' effect on UK annuities.
Osborne claimed that his radical pension reforms would give pensioners more choices at point of retirement, but Moody's said the chancellor had taken away a 'key driver of future profitability for many insurers'.
Moody's vice president and senior analyst David Masters said individual annuities currently account for around a half of UK life insurers new business value and one of their most profitable lines of businesses. Yet, individual annuity sales could fall by up to 75% following the announcement in the Budget, he said.
'Whilst these changes may ultimately encourage future savings into pension products, we think that the changes will significantly reduce sales volumes and margins in the UK individual annuity market, a key driver of future profitability for many insurers,' Masters said.
'These changes are credit negative for UK life insurers. First, annuity volumes are likely to decrease significantly, leading to falling value of new business from annuities and, over time, insurers' profits may also fall. Second, competition for retirement products from alternative providers is likely to increase considerably.'
Moody's said it expected that consumers and the financial services industry would take some time to fully adapt to the new regime, as consumers evaluate wider retirement options and providers reassess their product range and look to replace annuities.
While insurers are likely to try and capture retirement asset flows, through alternation products such as equity ISAs, SIPPs (Self-Invested Personal Pension) and drawdowns, new business margins and returns on these products are much lower than on individual annuities, reducing overall profitability.
Meanwhile, in a separate report Standard and Poor's said it anticipated that the pension reforms would reduce market growth projections for some UK insurers with narrow product profiles and affect the competitive landscape.
But it added: 'They are unlikely to have an immediate or material effect on the credit strength of our rated insurers.'
S&P said it would continue to examine long-term implications of the chancellor's reforms, but expects any negative effects to be mitigated by the sector's product diversity and balance-sheet strength.
