Market conditions for UK non-life insurers remain challenging as the difficult economic environment curbs demand for coverage and insurers can no longer rely on reserve releases to improve profitability, according to a report from A.M. Best Co.
The report looks at the UK motor, property and liability sectors and how they are being affected by the economy, low investment returns and severe flooding that occurred in June, July and September.
As investment returns remain low, insurers are coming under increasing pressure to focus on appropriate pricing, according to the report, titled “Rates Rise, but Economic Conditions Place Pressure on Performance.”
Rates for general insurance personal lines have improved, although those for commercial lines are lagging.
Weak economic activity is affecting some lines of business to a greater extent than others. While compulsory products are somewhat insulated, policyholders are more likely to consider purchasing lower limits and increasing excesses for discretionary products such as contents insurance. Insurers dependent on trade volumes are also being negatively affected.
A deep recession could lead to a further reduction in demand for insurance products, the report warns.
“Low investment returns and shrinking reserve releases are resulting in insurers having to focus increasingly on adequate pricing of risks,” said Catherine Thomas, director of analytics at the ratings agency. “Modest rate increases have been achieved for most lines of business in 2011 and 2012, with the greatest rate increases occurring in the motor lines. However, appropriate pricing of risks is challenging as economic difficulties are suppressing demand for insurance products, while excess capacity is chasing what business is available.”
Weather losses including those from 2012 floods have taken a toll on the UK property market.
“Prior to the 2012 floods, rates had experienced some upward pressure, although increases were modest,” said Yvette Essen, report author and director of industry research, Europe and emerging markets for A.M. Best.
“Rates are expected to gain further momentum post the floods, but to what extent remains to be seen. The level of weather-related losses is a key driver of performance in the property sector, and flood risk in particular is a major concern.”
In terms of financial instability in the Eurozone, the report finds UK insurers are partially insulated as they tend to hold sterling investments to match their sterling liabilities. However, there is the potential for asset exposure as some UK insurers have subsidiaries within the Eurozone, while other UK insurers are subsidiaries of Eurozone companies. A significant deterioration in global financial markets remains a risk to UK non-life insurers.
In addition to these challenges, UK non-life insurers continue to face uncertainty regarding the final specifications of Solvency II and the feasibility of the implementation target date of Jan. 1, 2014, according to the analysts.