According to Fitch Ratings, the insurance sector outlooks for major European non-life insurance markets in 2022 are mostly neutral, with Italy and the UK being the only exceptions.
The rating agency also noted that in most of the markets, the positives, such as better pricing conditions for commercial business lines, are mostly in line with the negatives, such as higher claims inflation and low investment yields.
In Italy, however, the non-life sector outlook is deteriorating as Fitch expects increasing claims frequency, particularly for motor insurance.
In the UK, the sector outlook for the non-life company market is also deteriorating, partly due to new pricing rules, but the sector outlook for the London insurance market is improving, reflecting the better pricing for commercial lines, which dominate the business.
Fitch reported that in Italy, driving activity and motor insurance claims are particularly strongly correlated with economic activity.
During lockdown restrictions, motor fell sharply due to low driving activity, and was well below normal levels, However Fitch expects it to return to pre-pandemic levels this year as the economic recovery continues.
However, Fitch also expects the country’s premium rates are unlikely to keep pace. We believe insurers are reluctant to push up premiums given the competitive pricing environment and customer expectations of rebates following low claims during the pandemic.
It also noted that underwriting profitability is likely to weaken accordingly, exacerbated by higher claims inflation.
In the UK, the contrasting sector outlooks for the non-life company market and the London insurance market reflect the different credit profiles of the two markets.
For the UK non-life company market, the sector outlook is deteriorating, following the rating agency’s expectation that high claims inflation, an increase in claims frequency towards pre-pandemic levels, and new pricing rules will reduce profitability.
The Financial Conduct Authority’s ban on dual-pricing strategies, which came into force on at the beginning of the year, will force insurers to overhaul their pricing and distribution strategies for motor and household insurance.
The measures include a requirement for firms to offer existing customers renewal prices no higher than the equivalent new-business price, and steps to make it easier for customers to decline auto-renewals.
The industry should expect the new rules to lead to lower margins for insurers in 2022.
For the London insurance market, the sector outlook is improving, which has been driven by continued improvements in pricing conditions for commercial lines, which would support underlying underwriting profitability. Several insurers reported double-digit percentage price increases in 2021.
Fitch believes these were driven by the market’s concerns over inflation, elevated catastrophe activity and increasing losses from cyber insurance due to ransomware claims.
Non-life insurers in all markets could be negatively affected if current high levels of inflation persist. Fitch’s base case is for high inflation to be short-lived, but if inflation significantly exceeds Fitch’s expectations over the next two years or more, insurers could face margin pressure in their short-tail business lines and reserve deficiencies in their long-tail lines.
