The 2021 outlook for insurance – What market factors will impact life insurers in 2021?

Thoughts from December 2020: COVID-19 driven market turmoil has presented major challenges to the institutions that invest in the real economy, including UK life insurers.

While unprecedented levels of government and central bank support, including changes to UK insolvency law, have softened the immediate economic and financial impacts of the pandemic, significant hurdles remain to returning to a more stable economic backdrop.

Through the crisis, we saw the PRA encourage UK insurers to prioritise capital retention and most insurers tapped the market to raise further hybrid capital to better manage the material uncertainties presented by the crises. UK life insurers have so far managed to adapt to the new environment well through various management actions, albeit this has come at the cost of distributions to shareholders and a moderately leveraged capital structure.

While Solvency II requires insurers to reserve for long-term historic credit default experience, these reserves could conceivably come under pressure during periods of severe economic downturn.

COVID-19 impact

The COVID-19 crisis has seen more than 2,000 companies’ or countries’ ratings (or outlook) being downgraded by S&P. 2020 has also been a record-breaking year for ‘fallen angels’ – companies losing their investment grade rating – impacting around £322bn of debt. According to S&P, the tally of corporate defaults reached 200 as of October 20 led by the US and Europe for the first time since 2009, with the expectation that “the COVID-19 shock will double company default rates across the US and Europe over the next nine months”.

Of course, some life insurers also have significant exposure to property, particularly through holdings in equity release and commercial mortgages. While residential property prices have been relatively resilient to the crisis so far, commercial property prices have fallen circa 8% since the start of the pandemic, driven to a large extent by the landslide shift to remote working. The risks of property prices falling in 2021 are arguably to the upside.

While most of the UK Life Industry is well-capitalised and has so far been resilient to the market shocks of 2020, the risks to the real economy prevail and may well advance through the course of the New Year.

Across the pensions industry, trustees and their advisors must recognise that some insurers will be more impacted than others, should corporate credit and property markets deteriorate next year. While each life insurer is different, weakness in one insurer (or a subset) could raise questions over the PRA’s general approach – and have knock-on impacts for the solvency regime more broadly.

The next 18 months

Over the next 18 months, we expect to see the impact of COVID-19 really play out across the real economy, impacts that will be accelerated in the short term by the end of government furlough and other support schemes in the spring.

In this context, it is important for schemes to understand the risks insurers are faced with. In order to gain a better understanding of these risks, we recommend that trustees stress test insurers’ balance sheets; monitor insurer developments using insurer-specific KPIs supported by other market data; and, ensure they have a developed understanding of the management actions available to trustees and sponsors, should risks to insurers start to crystallise.

This is not to say that transferring risk to an insurer is no longer the gold standard for securing members’ benefits in an increasingly uncertain environment. Notwithstanding the substantive risks to the real economy, which we expect to see play out to some extent in 2021, the insurance industry will remain much safer than most individual covenants in 2021.


Helpfully, the increasing number of options and innovations being made available to schemes through the developing superfund regime, capital-backed journey plans and broader innovations in risk-transfer will only increase the options available to schemes and ultimately, enhance the security of member benefits. Over the medium term, we could also be moving to an environment in which well-funded pension funds could raise capital through further innovation in journey plans.

When it comes to individual schemes, the challenge of 2021 is that there will be no escaping it. While some risks will be amplified, innovation being brought to the fore across the pensions industry will mean that more schemes have access to a much broader range of solutions through which they can secure members’ benefits.

Adolfo Aponte, Managing Director

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