According to Moody’s Ratings, the outlook for the UK life insurance and property and casualty (P&C) sectors remains stable, even as economic challenges continue to weigh on the broader market.
Moody’s notes that while slower economic growth may dampen demand for discretionary life protection and savings products, strong pension activity and the continued sale of mandatory P&C policies are expected to support insurers’ overall revenue. Elevated interest rates will also remain a positive factor, helping to sustain investment income across the industry.
Moody’s highlights that pension risk transfers will continue to be a major source of earnings for life insurers, driven by sustained corporate demand for such arrangements.
However, competition in this segment is intensifying, putting pressure on margins. In the P&C sector, prices have reached their peak for this cycle, and Moody’s expects results to moderate in the near term, although overall performance should stay sound.
The motor insurance market, in particular, has shown significant improvement, with leading firms reporting strong results. Nonetheless, Moody’s cautions that the industry’s combined ratio—measuring costs and claims against premiums—will likely remain above 100% unless recent consolidation efforts successfully ease competitive pressures.
In its latest assessment, Moody’s forecasts that insurers’ revenues will remain resilient through 2025, despite weaker GDP growth, which is expected to slow to 0.8%.
Economic expansion is projected to recover modestly to 1.3% in 2026, supporting the commercial P&C segment, which tends to move in line with business activity.
Moody’s also points out that mandatory insurance lines such as motor cover will remain largely unaffected by economic fluctuations, while continued auto-enrolment in workplace pensions and steady demand for corporate pension risk transfers will underpin life sector revenues.
Moody’s further observes that while UK interest rates have begun to decline, they remain high compared to historic averages, and 30-year government bond yields have risen.
This trend benefits insurers’ investment income, as older, lower-yielding assets mature and are replaced with higher-return instruments. Life insurers, whose portfolios contain longer-term assets and liabilities, stand to gain the most from this environment.
The agency notes that the strong demand for bulk purchase annuities (BPAs), transactions in which insurers take on corporate pension obligations in exchange for a premium, has bolstered life insurers’ operating earnings in recent years.
Moody’s expects this momentum to continue, but warns that as more insurers enter the market and competition for suitable long-term assets intensifies, margins may narrow.
Although investment portfolios across the sector remain diversified and of high quality, Moody’s remarks that the growing share of assets tied to annuities will increase overall exposure to asset risk.
Moody’s also comments that P&C pricing, both in commercial and personal lines, has reached a turning point after several years of steep increases.
Commercial insurers should still benefit from the cumulative effect of past rate hikes, but personal lines, especially motor, are now seeing sharp price reductions due to heightened competition. The agency notes that while leading players are performing well, the broader market may struggle to return to full profitability unless consolidation helps to stabilise pricing dynamics.
On the capital side, Moody’s finds that UK insurers remain strongly capitalised and resilient under a range of stress scenarios. However, the agency does not expect solvency ratios to strengthen further, as insurers are likely to reinvest excess capital into business growth, mergers and acquisitions, or shareholder distributions.
Moody’s also highlights ongoing sensitivities in the life sector, including potential risks from falling interest rates, property devaluations, and corporate bond defaults—all of which are more pronounced given the current economic backdrop.
After several years of pressure from rising claims inflation and weak motor margins, insurers have begun to rebuild reserves. Moody’s expects reserve releases to start contributing more meaningfully to profits again, supported by stabilising margins.
The agency notes that while uncertainty remains over long-tail reserves, bodily injury claims have remained stable and social inflation, claims growth driven by litigation trends, has been much less pronounced than in the United States.
Moody’s reports that natural catastrophe costs are still rising, with 2024 marking a record year for weather-related claims according to data from the Association of British Insurers.
Storm damage, subsidence, and frozen pipe claims have all increased, while the government-backed Flood Re scheme has absorbed a significant share of flood-related losses. Moody’s points out that persistently high reinsurance prices, which compel primary insurers to retain more losses for moderate events, are adding to the strain.
Regulatory oversight in the UK remains intensive, according to Moody’s, though the agency does not anticipate material effects on sales or earnings through 2026.
The Financial Conduct Authority’s review of the distinction between financial advice and guidance may eventually allow insurers to provide more support to customers nearing retirement, potentially boosting sales of individual annuities and other profitable retirement products.
Moody’s adds that tighter requirements around funded reinsurance are credit positive, as they should lead to stronger risk management and greater resilience across the industry.
Overall, Moody’s Ratings concludes that the UK life and P&C insurance sectors are well positioned to maintain stable performance despite modest economic growth, competitive pressures, and rising claims costs. Strong capital, disciplined management, and ongoing demand for pension and compulsory products continue to underpin the industry’s stability as it moves into 2026.
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