2021, an eventful year ahead for insurance transactions

The onset of COVID-19 shocked the capital markets. Towards the end of March 2020, a number of life insurers saw their borrowing costs jump by 50% while share prices dropped by up to 40%. Leading market indicators suggested a sharp deterioration in the real economy would follow.

UK Insurers – Cost of hybrid capital index


UK Insurers – Share Price

While the impact of COVID-19 has been significant to this point, (fortunately) our worst fears have not materialised. The economy has been kept on life support via unprecedented monetary and fiscal support.

Looking ahead, 2021 promises to be another eventful year for the end-state market in the UK for the following reasons:

Solvency II review

The EU and the UK are conducting the first review of the Solvency II Directive, which has the potential to loosen reserving requirements for insurers, while increasing appetite and enhancing pricing for bulk annuity products. A UK industry body, the Association of British Insurers (”ABI”), is calling for a multi-billion £ release of capital. Further details are set out in our InFocus piece.

Superfunds and alternative end-state solutions

The long-anticipated launch of superfunds has been deferred again.  The expectation is that the first deal might not now materialise until H2 202.

Meanwhile, there are early signs that alternative insurance and capital-backed solutions are gathering momentum in segments of the market.

ESG considerations

Insurers are racing to embed climate change related risks in their models by the end of this year and meet Task-force on Climate-Related Financial Disclosures (TCFD) requirements by 2023.

Transition to SONIA

UK insurers are expected to complete the transition from Libor to SONIA as the risk-free reference rate before the end of 2021, a change that may impact capital adequacy, the valuation of credit assets and some products offered by insurers.

Risk of a deterioration in credit conditions has not dissipated:

With fiscal and monetary policy expected to start ‘normalising’ in Q4 2021, segments of the economy are braced for a bumpy end to the year. Credit actions point to further downgrades to follow in 2021.

Read INFOCUS: Corporate credit risk in the insurance market

For more information contact Adolfo Aponte, Managing Director

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