Rating agency AM Best revised its outlook on the United Kingdom’s non-life insurance segment from negative to stable, as inflation is expected to decrease closer to the Bank of England’s 2% target in mid-2024, which should ease the pressure on claims costs observed in 2023.
The 12-month consumer price index (CPI) inflation has declined significantly, falling to 3.4% in February 2024 from a 30-year high of 11.1% in October 2022.
Throughout 2023, claims costs soared, and with inflation closer to its target, insurers would be better positioned to adjust their pricing assumptions benefitting the segment’s underwriting results, reports AM Best.
The ratings agency has stated some of the factors that have contributed to this outlook change. This includes the significant price corrections in personal lines that will help drive close to breakeven underwriting results. Market conditions in the commercial and specialty sector are also expected to remain favourable, along with higher interest rates that will allow the market to “lock in robust investment returns for the short-to-medium term.”
Factors that could moderate this outlook are the increased reinsurance cost leading several insurers to restructure their protection and increase retentions, which has increased the risk of earnings volatility. Although the January 1st, 2024, reinsurance renewals were orderly, and price rises signalled a continuation of the hard conditions in the segment. Direct writers have mostly accepted rate increases, and AM Best expects it to be passed on to policyholders.
In the UK personal lines, AM Best expects 2024 underwriting results in home and motor to be close to breakeven, driven by a return to underwriting discipline after two consecutive years where the average combined ratio exceeded 110%.
Improvements in underwriting results are expected to be driven by significant rate increases, projected this year to be in the double digits, combined with a reduction in the level of claims inflation compared with 2023, this will help lead to an improvement in results.
The underwriting results of the UK non-life segment should be supported by the strong market conditions in commercial and specialty lines, which continue to benefit from positive rate momentum, according to the ratings agency.
Comparatively, in the retail market, the commercial and specialty segments suffer to a lesser extent from price competition. In this context, underwriting discipline is expected to be maintained along these lines, with good terms and conditions, together with robust rate adequacy, likely to continue to support solid underwriting margins.
AM Best has concluded that the operating results are expected to be bolstered by increased investment yields as the segment reaps the rewards of higher interest rates.
In response to elevated levels of inflation, the BoE has raised its Bank Rate at 14 consecutive meetings since December 2021, reaching 5.25% in August 2023. Insurers have already started to realise higher investment yields, as their generally short-duration bond portfolios roll over, and for the first time since 2020, yields in real terms are positive, explained the ratings agency.
