Providers will probably be unable to transfer their annuity books to smaller businesses after the outcome of Prudential’s High Court case, according to Fitch Ratings.
Earlier this month the High Court blocked the proposed transfer of £12bn of annuities from Prudential to Rothesay Life.
The deal between the providers, which was first announced in March 2018, was denied after Mr Justice Snowden found Prudential had never mentioned to its clients that a transfer to another provider could occur.
He also found there was a fair degree of disparity between the two providers which could impact clients, with Rothesay being “a relatively new entrant without an established reputation in the business”.
Rothesay Life and Prudential have been granted leave to appeal the case by the High Court.
But according to credit rating agency Fitch Ratings, this decision could have a significant impact on the industry with transfers of annuity books from large businesses to relatively small, new entrants to the market continuing to be blocked by the court in the future.
This suggests annuity books will only be distributed among the largest businesses, cutting smaller firms out of the market altogether and leaving advisers with a dwindling choice of providers.
Fitch Ratings said: "UK life insurers seeking to reduce their exposure to annuity risks by offloading portfolios to other insurers may have to rethink their plans as a result of the High Court's decision.
"We believe that the ruling [...] sets a precedent that will restrict insurers' ability to transfer annuities to smaller or less-established companies, such as Rothesay, which was only created in 2007.
"Offering incentives to make policyholders more amenable to a transfer might help in certain cases. Nevertheless, we expect some insurers will have to retain business that they were hoping to offload, and instead use reinsurance or other forms of risk transfer to limit their annuity risks."
Prudential had already set up a reinsurance arrangement ahead of the planned transfer of contracts, reinsuring the business to Rothesay. This arrangement remains in place despite the court's decision.
Despite this arrangement, Prudential is still responsible for administering contracts and making payments to clients.
Fitch Ratings also highlighted the importance of the basis on which clients and advisers choose which annuity provider to use as they are often unable to switch providers later on in the process.
Fitch Ratings said: “In the Prudential case the judge highlighted the importance of the basis on which policyholders choose their annuity provider, including the age and established reputation of the provider and the financial resources available to it over the long lifespan of an annuity contract.
“Policyholders objecting to the transfer would not have the option to avoid it by cashing in their policy or switching to another provider of their choice.”
“Annuity contracts, in contrast to other life insurance products, are typically locked in for life and do not allow policyholders to take benefits out as a lump sum or to change provider.”