UK insurers are set to transform their investment strategies as the drive towards greater sustainability continues.
Ratings firm Fitch said the country’s life insurers will potentially allocate up to £170 billion to illiquid investments over the next decade, with a substantial portion of this allocation focusing on the creation of new environmentally sustainable assets,
“We believe that annuity writers’ investments into sustainable assets will continue to grow on the back of strong demand from corporates seeking to offload risks related to legacy pension schemes,” said Fitch. “Annuity writers invest in illiquid fixed-income assets with reliable long-term cash flows to match illiquid long-duration annuity liabilities.”
In a new commentary on the sector the firm explained the transition to a more sustainable economy is necessitating UK life insurers to demonstrate the long-term resilience of their investment strategies.
“To date, insurers have risen to the challenge, with some positioning themselves as sustainability leaders. However, difficulties in transitioning away from out-of-favour assets and risks related to stranded illiquid legacy assets remain. Given possible rating impact beyond our typical two-year rating horizon we therefore see limited implications on current ratings or Outlook.”
It added: “We believe that climate-related risks and opportunities mainly impact UK life insurers’ investment strategies, rather than through a material change on their overall business model.
“The long-term nature of life insurers’ investment portfolios exposes them to future financial risks from climate change, including changes in government policies and public attitude towards non-sustainable industries and companies. We believe that this early implicit adoption of sustainability considerations will help to mitigate future financial risks from climate change.”