S&P Review Finds U.K. P/C Market Stable

May 21, 2002

Standard & Poor’s has affirmed its stable outlook for the U.K.’s domestic non-life insurance industry, following a review of the financial strength characteristics, indicating that “the majority of its insurer financial strength ratings on market participants are unlikely to change over the coming year.”

The review concerned only UK domestic insurers, and did not include reinsurers or the Lloyd’s market.

“The UK non-life insurance sector is experiencing varying fortunes, with rate increases in the personal lines market slowing, while premium rates in the commercial lines market continue to rise steeply,” stated Simon Marshall, an associate director at S&P’s Financial Services Ratings Group in London.

Marshall explained that S&P had determined that underwriting results in personal lines were actually better in 2001 than 2000, with the industry combined ratio of around 100.3 percent. But he indicated that the market may have already reached the high point in the insurance cycle, and that “2002 might not see any further improvements.”

The report also warned of problems from increasingly frequent and higher damage awards in the UK which could “worsen policy loss ratios, and of a flattening of rates in the automobile insurance market, which has been on the rise.

S&P noted that “a positive trend for the commercial lines market has arisen from the terrorist attacks of September 11 last year.” Marshall felt that “the scale of the loss provided a catalyst for commercial lines rates to rise exponentially, particularly for large risks, promising stronger results for 2002.” He also noted that “the expected boon should help to improve the historically poor profitability of the market, which reported a weighted combined ratio of 115.5% for 2001.”

While rates on commercial lines are rising, perhaps enough to reduce or even eliminate the losses insurers have consistently posted from this business, Marshall wasn’t sure that the trend would continue, “as commercial lines brokers remain a powerful force in the sector and have historically been able to keep rates low for their clients.”

S&P’s report also noted that “the fall in equity values will continue to constrain the sector’s capital adequacy, which also remains vulnerable to potential future losses arising from severe weather.” marshall stated that,” the level of catastrophe reinsurance protection in the UK, especially in respect to flood risk, remains inadequate.”

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