In a research note released last week, the rating agency puts the UK life insurance sector on negative outlook, citing a lack of control over distribution alongside depressed capitalisation, weakening profitability and substantial exposure to equities.
Moody’s warns of life offices’ lack of control of product distribution due to their dependence on the IFA sector.
It says: “The lack of control over this channel, combined with the often high levels of commission required to retain business flow, make IFA distribution a contributor to the poor financial performance of many UK life companies.”
Moody’s also highlights the introduction of personal accounts in 2012 as a potential threat to insurers. It says personal accounts are likely to have a limited “cannibalisation” impact due to the scheme’s focus on lower-earners.
But it adds: “We expect that there is still a real risk that, through price contagion, this could add further sustained pressure to the profitability of pensions.”
In the short term, Moody’s says that reduced consumer spending on life and pensions during the recession will mean that insurers have to compete intensely to retain market share, putting pressure on pricing and commission.
Moody’s says even though many life players are showing a robust capital position, there has been some deterioration and if the economy enters a prolonged period of slowdown, it is unlikely that capitalisation levels will improve significantly in the short to medium term.
Unity Independent Financial Planning director Jon Willis says: “Many life offices also have direct distribution through their bancassurance networks. I think that the IFA sector will continue to be used by insurers as people need independent advice when choosing products such as pensions, protection and investments.”