March 27, 2017 / 1:10 PM / 8 months ago

Fitch: UK Life Sector Conduct Risks Support Negative Outlook

(The following statement was released by the rating agency) LONDON, March 27 (Fitch) Mis-selling provisions booked by three UK life insurers show regulatory scrutiny of firms' historical conduct remains a threat to profitability and support our negative sector outlook, Fitch Ratings says. The high levels of capitalisation across the market should allow UK insurers to absorb compensation costs and fines without any major effect on their credit profiles. However, significant negative press coverage of future findings could lead to reputational damage and the risk of loss of business for affected insurers. Recent Financial Conduct Authority (FCA) proposals to establish an annuity comparator tool and increase the information provided to customers will, once implemented, reduce insurers' exposure to annuity mis-selling investigations. But the regulator is likely to increase its focus on other business areas, such as the level of fees charged on savings products. In their 2016 annual results, Prudential and Standard Life announced that they had each set aside provisions of GBP175 million related to the potential mis-selling of annuities. This followed an FCA investigation into whether customers purchasing standard annuities were given sufficient information about their potential eligibility for an enhanced annuity. Similarly, Phoenix announced a GBP25 million provision covering both the annuity sales review and another FCA thematic review into the fees charged to long-standing customers in the life insurance sector, affecting Abbey Life business acquired from Deutsche Bank. Old Mutual has also stated that it is working with the FCA on its review of the treatment of long-standing customers. However, it has not made any explicit provision for any related costs. The impact varies significantly across the affected companies, being more costly for Standard Life where the provision represents 24% of 2016 operating profits, compared to 4% for Prudential and 7% for Phoenix. However, the impact on capital is limited, with provisions being around 3% of Solvency II own funds for Standard Life and less than 1% for Prudential and Phoenix. Moreover, both Prudential and Standard Life have indicated that they may ultimately be able to recoup some of the costs from reinsurance recoveries and Phoenix has stated that it has an indemnity agreement with Deutsche Bank, which will cover up to GBP175 million of costs related to the FCA's review. These arrangements could significantly reduce the ultimate financial impact on the firms. We previously estimated that compensation costs across the UK life insurance industry as a result of the annuity sales review could be in the region of GBP500 million. Given the reported provisions, this estimate remains appropriate. The FCA has not made public a list of the companies that it has instructed to investigate potential mis-selling of annuities, but the absence of disclosures by other major UK life insurers in their 2016 results suggests any impact of the review on other firms may be small. In addition to the investigations into annuity sales and fees on long-standing customers, the FCA is also currently conducting reviews into retirement outcomes and the effectiveness of independent governance committees for workplace pension schemes. The European Insurance and Occupational Pensions Authority has also announced an EU-wide investigation into conduct in the unit-linked life insurance market. All of these reviews could further affect UK life insurers. Contact: Sam Mageed Director Insurance +44 20 3530 1704 Fitch Ratings Limited 30 North Colonnade London E14 5GN Willem Loots Senior Director Insurance +44 20 3530 1808 Simon Kennedy Senior Analyst Fitch Wire +44 20 3530 1387 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: athos.larkou@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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