Strong bulk annuity volumes are expected for 2025, which will continue to benefit UK life insurers despite potential challenges from regulatory changes, according to a recent Fitch Ratings report.
Driven by favourable market conditions and significant capital inflows, analysts expect transactions to exceed GBP40 billion for the third year in a row.
Despite the potential for a short-term weakening of bulk annuity pipelines due to the UK government’s plan allowing well-funded pension schemes to release surpluses to sponsoring employers, Fitch still anticipates strong demand from sponsors seeking to transfer pension liabilities to insurers to reduce balance-sheet risk.
The life sector has good capacity to meet the demand due to strong capital and several recent new entrants, drawn by the predictable long-term profitability of bulk annuities.
Despite high barriers to entry in the bulk annuity market, Fitch has observed several recent new entrants.
Firms require significant long-term capital and specialist expertise, including asset sourcing, actuarial modelling and risk management, and regulatory approval is not straightforward,” Fitch explains.
Adding: “However, there have been several new entrants recently, with Royal London and Utmost entering the market in 2024 and Blumont Annuity joining this year. These insurers are bringing substantial capital and asset-sourcing capabilities to the market and helping to revitalise deal activity from smaller pension schemes.
“Meanwhile, more established insurers have implemented price monitoring and streamlined solutions to serve the small scheme market, while those with robust excess capital continue to pursue larger deals.”
According to the report, an increasing number of new and established reinsurers are showing interest in the UK bulk annuity market.
For example, InEvo Re, a reinsurer established by Macquarie Asset Management, completed its first reinsurance transaction with a UK life insurer in the first quarter of 2025.
“We expect continued use of funded reinsurance to support large bulk annuity transactions despite fairly muted market activity in late 2024 due to tighter regulations, Fitch stated.
“However, we do not expect the use of funded reinsurance to exceed 30% of bulk annuity premiums, and insurers are likely to limit their exposure to individual credit-focused reinsurers and the associated concentration risks.”
The upcoming life insurance stress test (LIST 2025) conducted by the Prudential Regulation Authority (PRA) will reveal more about the vulnerabilities and resilience of bulk annuity providers, analysts noted.
Bulk annuity insurers’ growing demand for long-term illiquid assets, including private credit, is a key focus for Fitch due to potential transparency risks.
However, Fitch expects insurers to limit exposure and maintain diversification, driven by prudent risk appetites and regulatory scrutiny.
The PRA’s recent proposal to remove the regulatory approval requirement for insurers claiming a ‘matching adjustment’ benefit on certain assets could help them to take advantage of investment opportunities more quickly.
Thanks to the matching adjustment, insurers can take credit for the illiquidity premium earned on certain assets, which would be held to maturity by factoring it into the discount rate for their annuity liabilities.
Fitch concluded: The proposal, if adopted, may lead to higher investment risk due to the increased flexibility that insurers would have when making investment decisions. However, we do not expect a significant shift in insurers’ investment risk appetite as the regulator would require firms to have contingency plans for assets that do not receive subsequent approval for matching adjustment eligibility, and it would still expect them to adhere to the ‘prudent person’ principle in making investment decisions.”
