S&P Global Ratings sees broadly stable trends for the UK insurance sector but warns that a no-deal Brexit outcome could have important long and short-term implications for the UK economy, which could be a key risk for ratings on UK insurance firms.
The global financial services ratings agency maintains a base-case scenario that the UK will not leave the European Union (EU) without a deal, adding that in S&P’s view, UK insurance companies are “well-positioned to weather short-term Brexit-related uncertainties in 2019.”
However, the fact remains that the possibility of the UK leaving the EU without a deal remains fairly high, with widespread uncertainty continuing to underpin the political landscape in the country.
“A no-deal Brexit would also weigh on our view of the U.K. insurance industry and country risk, which could affect our view of U.K. insurers’ business risk profiles,” says S&P.
Furthermore, a no-deal Brexit could also have a negative impact on S&P’s view of UK insurers’ financial risk profile, which could lead the ratings agency to impose additional capital requirements on its capital model because of the potential lower credit quality of companies’ bond portfolios.
“Other effects could include more equity volatility, increased collateral requirements, or reduced liquidity. We anticipate that outlook revisions, rather than widespread downgrades, would be more likely to occur within the U.K. insurance sector in the event of a no-deal Brexit,” explains S&P.
Should the UK manage to leave the EU with a deal, S&P says that it does not expect UK insurers’ business risk profiles to alter much in 2019-2020. Most change is likely to come from major merger and acquisition (M&A) activity or immediate disruptors, says S&P.
By sector, and S&P says the UK life insurance market is exposed to an intermediate level of industry risk, although its overall industry and country risk is low. The overall industry and country risk for the UK property and casualty (P&C) sector is assessed as intermediate by S&P.
Looking forward, S&P sees more growth potential in the UK life sector when compared with the UK P&C insurance sector.
“Cost-saving measures will be a priority for all insurers for 2019. These will include reducing staff, outsourcing, and using or testing artificial intelligence capabilities or robotic equipment. These measures will enable insurers to optimize marketing, reduce fraudulent claims, and improve process efficiencies in the coming few years and defend their market share.
“In our view, the cost pressure, combined with the need for technological innovation and the search for synergies and economies of scale, is driving M&A in the U.K. insurance market,” says S&P.