A.M. Best: UK Non-Life Insurers’ Earnings Remain Under Pressure

October 5, 2015

Market conditions for UK non-life insurers are challenging as pricing remains weak across most business lines amid fierce competition, according to a new A.M. Best special report.

Titled “UK Non-Life Earnings Under Pressure, In Spite of Legal Reforms,” the report said, first-half results in 2015 benefited from the absence of large flood and storm losses, but the frequency and severity of weather-related events in the remainder of the year will be a key driver of final performance.

In the motor sector, A.M. Best found, the positive impact of recent legal reforms on claims experience will be at least partly offset by last year’s pricing actions. Meanwhile, liability insurers are dealing with an increase in claims for industrial disease, particularly in respect of noise-induced hearing loss.

For the property sector, good performance has attracted competition and prices have fallen over the past five years, the report said, noting that rate deterioration is expected to continue through 2015, albeit at a slower pace than last year, putting upward pressure on combined ratios.

“Earnings in the UK non-life sector are under pressure in 2015 as market conditions remain tough. Insurers are struggling to achieve rate increases, and from November will have to contend with a 3.5 percentage point rise in insurance premium tax,” said Catherine Thomas, senior director, analytics.

“The extent to which insurers can pass on the tax increase to consumers will be limited by pressure to remain competitive,” she said.

“In such a highly commoditized, price-sensitive market, insurers are searching for differentiators to improve their individual performance and competitive position. In the commercial lines sector, more companies are developing e-trading solutions for small to medium-size clients, which should reduce costs and speed up the underwriting process,” Thomas went on to say.

Despite challenges, the UK non-life market is still profitable. Positive underwriting earnings have been reported in each of the last five years, albeit with the help of reserve releases, the report said.

An A.M. Best analysis of the 25 largest UK-regulated insurers, ranked according to non-life gross premiums written (GPW), showed overall they reported better underwriting results in 2014. Accident-year performance benefited from a relatively low level of weather-related losses, in spite of flood and storm activity in the first few months of the year, and prior-year redundancies again made a positive contribution.

The report also examines UK non-life insurers’ investment portfolios, which tend to be conservative, consisting predominately of fixed-income assets such as treasuries and high-grade corporate debt.

“Consequently, investment income is expected to be modest in 2015, given the low interest rate environment,” the report said, adding that some companies have increased their exposure to credit risk in order to enhance yield, although this has not led to a material increase in the industry’s overall investment risk profile.

Equities remain a small proportion of overall assets, thereby limiting the potential effect of equity market volatility, A.M. Best said.

Source: A.M. Best

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