Moody’s Ratings, the credit ratings agency, expects the outlook for the UK’s life and property and casualty (P&C) insurance sectors to remain stable.
The agency says insurers should continue to benefit from strong sources of revenue, including higher investment yields, growing pension savings and consistent demand for compulsory insurance. However, economic uncertainty, weaker insurance pricing and rising claims costs are expected to put pressure on profitability.
According to Moody’s, P&C insurers have entered 2026 with relatively strong earnings. Reserve releases, favourable weather conditions and reduced reinsurance costs have supported results. The agency nevertheless expects the decline in insurance prices seen recently to weigh more heavily on underwriting margins during 2027.
Life insurers are expected to benefit from continued expansion in workplace pensions and sustained demand from pension schemes seeking to transfer risk. Moody’s says competition in the bulk purchase annuity (BPA) market is, however, becoming more intense, with additional providers and greater capacity contributing to narrower margins.
The broader economic backdrop is expected to remain challenging. Moody’s Ratings forecasts that UK insurers will continue to generate revenue growth in 2027 even as unemployment increases and inflation remains relatively persistent. Inflation is expected to moderate but remain around 3%, which could continue to increase household costs and affect consumer confidence.
Moody’s says the life sector should receive support from ongoing demand for pension risk transfers and the movement away from defined benefit (DB) pension arrangements towards defined contribution (DC) schemes. P&C insurers, meanwhile, are expected to receive some support from economic growth, with UK GDP forecast by Moody’s to expand by approximately 1.1% in both 2026 and 2027.
Investment conditions are also becoming more favourable for insurers as UK government bond yields remain elevated. Moody’s notes that the Middle East conflict has contributed to gilt yields reaching levels not seen since 1998, with 30-year yields also reaching multi-year highs. For insurers, this creates an opportunity to reinvest maturing bonds at higher rates.
Moody’s expects life insurers to gain the greatest benefit over time because their businesses are supported by longer-term assets and liabilities. P&C insurers, whose investment portfolios generally have shorter durations, are expected to see the effect of higher yields sooner.
The agency says higher gilt yields are also influencing how life insurers allocate capital. Some are increasing their exposure to government bonds while reducing investment in assets such as private credit. Moody’s adds that strategies involving derivatives and repurchase agreements can improve investment spreads but may also create additional liquidity risks.
The BPA market remains an important source of growth for life insurers. Moody’s expects demand to remain strong as well-funded pension schemes continue to transfer their liabilities to insurers and corporate sponsors look to reduce exposure to DB pension obligations.
At the same time, the agency expects profitability on new BPA transactions to become more constrained. Moody’s attributes this to tight corporate spreads, increased competition from new market entrants and the emergence of alternative solutions. Competition for the long-duration assets needed to support annuity liabilities is also putting pressure on investment returns.
Moody’s says insurers may be able to protect margins over time through changes to asset allocation and portfolio optimisation. The agency also expects insurers to benefit from the expansion of workplace DC pensions through increased fee income. DC assets under management stood at £0.8 trillion at the end of 2024, while Legal & General Group Plc estimates that the figure could reach approximately £1.5 trillion by 2034.
Motor insurance has shown signs of stabilisation, according to Moody’s Ratings. Pricing pressure has eased as several insurers have either withdrawn from parts of the market or consolidated their operations. At the same time, motor claims inflation has fallen significantly from the levels seen following the pandemic and is now at mid-single-digit levels.
The agency says these developments should continue to support motor underwriting results, provided insurers maintain disciplined pricing. However, conditions elsewhere in the P&C market are less supportive. Home insurance prices are continuing to weaken, while commercial insurance rates are falling more rapidly as insurers compete in a market with ample capacity.
Moody’s expects P&C underwriting performance to remain healthy during 2026, supported by favourable weather, reserve releases and lower reinsurance costs. It warns, however, that the deterioration in pricing could begin to have a more substantial effect on margins from 2027.
Capitalisation across the UK insurance industry remains a source of strength. Moody’s says solvency ratios have declined from recent highs but remain robust. The agency does not expect a significant improvement in the near term, partly because insurers are currently opting to reinvest surplus capital or return it to stakeholders.
Life insurers continue to face sensitivity to several market risks, including credit defaults, interest rate movements, property valuations and broader credit conditions. Moody’s Ratings also highlights regulatory scrutiny of funded reinsurance arrangements as competition in the BPA market encourages insurers to consider a wider range of long-dated investments.
For P&C insurers, the Prudential Regulation Authority (PRA) is placing greater emphasis on reserving standards as market pricing becomes less favourable, according to Moody’s Ratings.
Claims inflation remains another area of concern. Moody’s notes that increasingly severe weather events could result in greater earnings volatility, despite some protection from lower reinsurance costs. While weather conditions during 2026 have so far been relatively favourable, the ABI reported that insurers paid a record £6.1 billion in property claims during 2025, including £1.2 billion arising from weather-related events.
Vehicle technology is also contributing to higher motor claims costs. Moody’s points to the increasing use of electric vehicles (EVs) and more sophisticated vehicle systems as factors that could raise repair costs. EVs can be more expensive to repair than conventional vehicles, while battery damage can increase the likelihood of a vehicle being declared a total loss.
The agency also highlights continuing regulatory attention on customer outcomes, claims management and pricing. Moody’s says restrictions on insurers’ ability to differentiate between risks or adjust premiums could make it more difficult for companies to respond to rising claims costs, potentially placing further pressure on underwriting margins.
Longer-term demographic trends provide a more positive backdrop for life insurers. Moody’s expects the UK’s ageing population to contribute to sustained demand for pension and retirement products. The agency also identifies potential benefits from the FCA’s Advice Guidance Boundary Review, which is intended to enable insurers to provide simplified guidance to customers approaching retirement.
According to Moody’s Ratings, this could help insurers retain existing customers while increasing demand for annuities and other retirement income products. Insurers with established workplace pension operations and sizeable retirement businesses could be particularly well positioned, as they may have greater opportunities to offer additional products and services to existing customers.
