Fitch said it expects the sector’s 'strong business profile and capital headroom' to continue to underpin ratings in the hypothetical scenario of the UK sovereign rating being downgraded by one notch to ‘A+’ - the UK was given an 'AA-' rating on Thursday.
The agency said it also expected insurers’ investment concentration exposure to UK gilts to remain within rating tolerances.
Under Fitch’s rating criteria, sovereign rating changes - such as the UK's revised outlook to 'negative' - can affect both the scoring of investment risks, as well as an insurer’s industry profile and operating environment, know as IPOE.
However, Fitch released a statement stating:
"UK insurers are directly exposed to sovereign risk through their investments in gilts. However, we assess Insurers’ exposure, as measured through the agency’s sovereign investments/capital ratio, as manageable under a scenario where the UK’s rating is downgraded by one notch."
It went on to note that it does not expect a decline in its scoring of the UK insurance sector’s IPOE of ‘AA+' to 'A-’ under a one-notch downgrade scenario, and noted that the upcoming review of Solvency II regulations are unlikely to lead to a material reduction in capital requirements, and therefore will not prompt life insurers to significantly increase their risk appetites.
The statement warned that, were the UK's sovereign rating to be downgraded further, this could cause insurer ratings to come under pressure - however, it noted that insurers hold strong liquidity buffers which are stress-tested, and concluded "Fitch expects insurers’ liquidity positions to have comfortably withstood the recent market volatility".