Rating agency AM Best has opted to maintain its negative outlook on the UK non-life insurance market, due to factors such as lower premiums following the COVID-19 pandemic, strong competitive pressures on underwriting performance, and Brexit-related uncertainty.
Analysts noted that the underwriting margins of UK non-life insurers are likely to be further squeezed this year as a COVID-19-driven slowdown in economic activity puts pressure on premium volumes.
However, the impact on earnings of reduced demand for insurance, particularly from the SME, hospitality and aviation sectors, is likely to be partly offset by lower claims activity in the motor sector, as there are fewer cars on the road.
In AM Best’s view, claims experience directly related to COVID-19 will be manageable for diversified companies, but the results of companies with a focus on affected lines of business, such as travel and event cancellation, could see larger losses.
Meanwhile, investment returns will be hit by equity market declines and lower reinvestment yields, and financial markets are expected to remain volatile through 2020.
AM Best also observed that underwriting results were already under pressure going into 2020 because of the highly competitive operating environment.
For example, motor premiums continue to fall despite claims inflation in recent years, while in the property segment, price competition is putting pressure on rates even though attritional claims inflation and weather events are driving up costs.
In 2018, the UK non-life sector reported a modest underwriting profit overall, in part driven by improved performance in motor for the second consecutive year, but in 2019 results have been less favourable due to lower premium rates and claims inflation.
AM Best expects price competition and claims inflation to persist through 2020, partly due to a bias in the UK towards telephone and internet sales, as well as the prevalence of price-comparison websites.
Weather and flood risk have also been a significant driver of performance, with property rates remaining under pressure in 2020 due to strong competition and the availability of relatively cheap reinsurance mean.
In addition, political and economic uncertainty associated with Brexit continue to weigh on the UK nonlife market.
While the effects are difficult to predict, AM Best believes they are likely to be negative, at least in the short term, with potential issues including a weakening of sterling, and an increasingly challenging investment environment.
