The UK life industry is facing significant regulatory change that will force insurers to change their business models, a new report by Standard & Poor’s (S&P) says.

Among the changes are the Solvency II regulations, the Financial Services Authority’s retail distribution review that stops upfront commissions, and new rules requiring employees to be automatically enrolled into company pension schemes.

“We anticipate that all three will have a high impact on the industry, and the market's likely reaction following their introduction is still unclear,” the report says.

“But we expect the long-term net effect of the planned regulatory changes to be positive for the risk profiles of companies within the life insurance industry.”

S&P says the reforms could deliver competitive advantages for insurers as they review existing products and create operational efficiencies.

It also expects “fundamental improvements” in distribution with the removal of upfront commissions.

“While demand could fall in the short term as consumers and advisers adjust to the new system, we expect to see significant long-term market benefits, such as lower lapse rates,” S&P says.

S&P says the biggest regulatory risk facing insurers will be Solvency II, but many companies have been preparing for it so the adjustment may not be significant.

“We expect that diverse risk exposure, capital buffers and strong risk management will continue to lead to overall competitive advantages,” the report says.