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2020 Budget is positive for UK insurers, but challenges persist: A.M. Best

13th March 2020 - Author: Luke Gallin

Overall, the recently announced UK 2020 Budget is generally positive for UK insurers but the sector is still faced with challenges, reports financial services ratings agency, A.M. Best.

SavingsFollowing the announcement of the 2020 Budget by the UK Chancellor of the Exchequer earlier this week, A.M. Best has offered some thoughts on what this might mean for the country’s insurance industry.

The chancellor announced that expenditure on flooding would double, a move likely to be welcomed by insurers while greater demand for protection is also expected as a result of increased investment in infrastructure, including roads, railways and housing.

The ratings agency notes that during 2018 and 2019 the performance of the UK property market was impacted by weather-related events, and most notably flooding that devastated parts of the country, as has been the case so far in 2020 as well.

The 2020 Budget includes an increase in spending on flood defences to £5.2 billion between 2021 and 2027, and A.M. Best states that ultimately this will likely lower both the frequency and severity of claims in the worst affected areas.

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In November of last year, parts of Northern England were hit hard by flooding with more than 500 properties reportedly flooded and 1,200 households evacuated as certain parts of the region was hit with a month’s worth of rain in just 24 hours.

Non-life insurers in the UK then experienced two large storms just a week apart in 2020, with reports suggesting that these two events, storms Ciara and Dennis, could push UK insurers to an underwriting loss.

As well as the increased spending on flood defences, A.M. Best also comments on the chancellor’s measures to stem the impact of the COVID-19 outbreak on the UK economy.

“AM Best does not expect losses directly related to COVID-19 to be material for diversified UK insurance companies. However, the outbreak increases the likelihood of an economic downturn, which could have implications for insurers’ premium volumes and their broader claims experience,” says the ratings agency.

As noted by the ratings agency, the 2020 Budget came soon after an announcement from the Bank of England designed to assist UK businesses and households in light of potential economic disruption from the virus. This included an emergency reduction in the Bank of England’s base lending rate to a historic low of 0.25%.

According to A.M. Best, this measure is expected to drive investment gains in 2020, however, reinvestment yields on fixed income securities will be down moving forward, which ultimately adds pressure to insurers’ investment returns.

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