AM Best is maintaining its negative outlook on the United Kingdom’s non-life insurance segment, citing economic pressures, underwriting performance challenges and the limited availability of reinsurance protection as key drivers.
The rating agency notes that high levels of inflation, driven by supply chain disruptions, a tight labour market and elevated energy prices, are anticipated to persist in 2023, and will likely continue to challenge performance, particularly in retail motor and property lines.
AM Best observes that in October 2022, UK Consumer Price Index (CPI) inflation reached 11.1%, a 30-year high which is far more than the Bank of England’s (BoE) 2% target.
This remained high at 10.4% in February 2023 and is projected by the BoE to exceed its 2% target over the short to medium term.
“Throughout 2022, claims costs soared, owing to the rise in the price of replacement parts and elevated labour costs,” AM Best writes.
The firm continues, “Inflationary pressures had a material impact on the profitability of motor and property lines, which account for approximately 60% of the UK market’s non-life retail gross written premium.”
Further, AM Best states that the Russia-Ukraine conflict in early 2022 exacerbated a deterioration in global macroeconomic conditions.
The rapid increase in inflation and Bank Rate that ensued pushed up the cost of living in the UK in 2022, with households experiencing higher prices for general purchases, rising bills and substantial increases in mortgage payments.
AM Best explains that a prolonged period of weak economic conditions usually reduces consumer demand for insurance, as rising household outgoings deplete disposable income that may otherwise have been used to purchase insurable goods.
The rating agency adds, “During an economic downturn, insurers also tend to see higher incidents of fraudulent or exaggerated claims.
“Over the past two years, several insurers have reported an increase in fraudulent claims across motor, home and liability lines. Given the ongoing economic pressures in the UK, this remains a threat to the market in 2023.”
AM Best also expects that the higher cost of reinsurance protection is likely to squeeze underwriting margins.
At the 1 January 2023 reinsurance renewals, the firm says it observed a continuation of the significant hardening of reinsurance rates that took place in 2022.
AM Best writes, “Given the highly competitive market environment, as well as the inflationary pressures that are affecting insurance-buying decisions, it is unlikely that UK insurers will be able to pass on the elevated cost of reinsurance to their customers, particularly to retail clients.
“Companies may be left with two choices: to either reduce the level of reinsurance cover purchased and retain more risk; or, to absorb the increased cost of reinsurance, which would further erode the already pressured underwriting margins reported by the sector.”
Despite the overall gloominess, AM Best has outlined some potential moderating factors that that may somewhat offset the aforementioned headwinds.
According to the firm, rising interest rates, combined with the short average duration of the market’s investments, present an opportunity to reinvest at more attractive yields.
Analysts at Jefferies recently reported that UK motor insurance pricing continues to harden, with a 35% increase year-over-year in February.
Jefferies analysts said, “Our UK motor insurance tracker shows that premiums are +35% higher YoY in February and +3.4% higher versus the prior month.
“Whilst this is encouraging, it is worth noting that the market is still playing catch up.
“Market premiums fell 17% in 2020/21, and our tracker suggests that premiums have not sufficiently adjusted since to cover rapidly rising claims costs in 2021/22.”
Meanwhile, AM Best anticipates continued positive pricing momentum in commercial lines as well as the positive impact of legislative reforms on claims costs are likely to increase over time.
