Insurance Outlook 2024

We have also been involved in significant reinsurance transactions in respect of pension deriskings, which is an area of ongoing regulatory focus for the PRA, as reflected in its recent consultation (CP24/23 – Funded reinsurance) - discussed in our November briefing.

The landscape of the market is evolving, with the potential for additional capacity from further new entrants (following M&G’s re-entry after a seven-year absence), insurers becoming more selective in how they deploy their resources prior to entering exclusive negotiations, and greater levels of regulatory intervention. Over the coming year, alongside supporting our clients through high levels of transactional activity, we will be monitoring the increased scrutiny being applied by the PRA to life insurers in this market, including the outcome of CP24/23.

We expect that the level of growth in this market will continue to attract interest from potential investors, both in respect of those providers with established positions and others (such as private equity) with a broader interest in participating in the market. In addition, there is the potential for political events this year to impact the market environment, as well as scope for the policy on interest rates to affect the levels of scheme funding.

M&A

We are cautiously optimistic that 2024 will see an increase in M&A activity, relative to the decreased levels experienced in 2023 against a backdrop of market volatility, high inflation and rising interest rates. This includes ongoing strategic acquisitions and disposals, as companies look to dispose of non-core businesses and consolidate their core businesses and markets, or seek bolt-on acquisitions to support ESG, insurtech and digital transformations. Though high interest rates are expected to remain for some time, a stabilisation of interest rates may lead private equity sponsors to take advantage of market conditions to deploy unprecedented levels of dry powder accumulated due to the slow-down of activity in 2023, notwithstanding the increased cost of debt finance. We may also see private equity exits in 2024, as sponsors look to crystallise their investments.

Solvency UK

Solvency UK will be introduced in stages over the course of 2024. The amendments to the risk margin methodology came into effect on 31 December 2023, potentially allowing a significant release of capital by firms. The impact on balance sheets in the short term will depend on a number of factors, including the current application of transitional measures on technical provisions. Changes to the matching adjustment are expected to come into effect at the end of June 2024. It is hoped that the combination of these changes will allow insurers to invest large amounts of capital into productive assets such as infrastructure – an ambition supported by industry groups such as the Investment Delivery Forum.

The remainder of the Rulebook changes will be implemented from the end of 2024. Some of these are yet to be consulted on – the PRA plans to publish a further consultation in Q1 2024, although this is not expected to contain substantive changes to the rules. Practitioners will nevertheless be interested in the detail of how relevant European legislation and guidance will be transposed into the UK regime.

Captive insurers - a new framework?

In his Autumn Statement, the Chancellor included an announcement that the Government will consult in Spring 2024 on the design of a new framework for encouraging the establishment and growth of captive insurance companies in the UK.

The introduction of a new regime for captive insurers has been lobbied for by the London Market Group (which is supported by the International Underwriting Association of London, Lloyd’s of London, the Lloyd’s Market Association and the London & International Insurance Brokers’ Association) and was included as a priority in its 2023 Plan for the Future. In that document the LMG states that there are currently no captive insurers in the UK and argues that this is the result of a regulatory system which does not differentiate between captives and other insurers. In principle, captives present a lower risk to the overall financial system because they only write risks belonging to their own corporate group.

No details of any potential future framework have been released by the Government at this stage but the expectation would be that captives would have more streamlined governance and reporting, and possibly lower capital, requirements. This would encourage UK based corporates and public sector bodies to use onshore captives, among other things reducing the transfer of assets overseas.The creation of a 15% global minimum tax rate has reduced the incentive to locate captive insurers overseas, albeit the UK tax rate on captive insurance profits (25%) remains rather higher than the tax rate in, for example, Bermuda. While unlikely in the current political climate, a reduction in the UK rate for captive insurers (as the UK has already done for patent income) would provide further support for this initiative.

In parallel with this, Lloyd’s has been promoting its market-place for the establishment of captive syndicates. It is understood that none are currently in place, but existing structures within Lloyd’s would allow captive syndicates to use Lloyd’s international underwriting permissions and, where relevant, to share the financial strength rating of the Lloyd’s market. Capital would be provided to the captive syndicate by its corporate group, via a UK corporate member at Lloyd’s.

The Consumer Duty and closed books

Legacy products, or closed-book business, has been an ongoing regulatory focus for the FCA for a number of years. The FCA first announced a thematic review of closed books in its 2014/15 Business Plan, culminating in the publication of FG 16/8. That guidance focuses on aspects of the customer journey such as clear and timely communications, switching of products and consideration of fund performance.

The implementation of the Consumer Duty for closed books is likely to require additional action by firms. Whilst the FCA has said repeatedly that the duty will not infringe vested rights and that firms will not be judged with the benefit of hindsight, firms do need to consider the price and value outcome in respect of their closed products. This includes considering whether “there is and remains a reasonable relationship between the price customers pay and the benefits of the product or service”. The FCA’s guidance (in FG 22/5) on what constitutes a vested right suggests a relatively limited scope – it comments, for example, that “where a customer can terminate a contract without an exit charge, firms have no more than an expectation of the customer continuing the contract”; future contractual rights are therefore not necessarily vested.

Potential solutions proposed by the FCA where issues are identified but vested rights apply include providing greater flexibility on how customers can engage with a product or assisting a customer to switch to a new product or service that does not have the same issues. The guidance does not give clarity on how firms should address vested rights where these options do not address the issue identified, or on situations where a firm has contractual but not vested rights and the assessment of the product fails the price and value outcome test. In the 2016 guidance, the FCA stated that firms were not being required to amend their T&Cs in light of current regulatory requirements, or to dis-apply or amend T&Cs to reflect the changing expectations of customers. It does appear that the ground has shifted somewhat, and firms with closed books may have work to do between now and the end of July to ensure they meet the required standards.

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