Analysts at Fitch Rating have warned that their sector outlook for the UK non-life company market in 2023 is deteriorating, while the outlook for the London insurance market sector remains neutral.
The rating agency says that its diverging sector outlooks reflect the different credit profiles of these two subsectors of the UK non-life insurance market.
“The deteriorating sector outlook for the UK non-life company market is driven by our view that the introduction of general insurance pricing practices, high claims inflation, normalising claims frequency coupled with significant lag in pricing corrections driven by strong competition in the sector will put downward pressure on earnings in 2023,” Fitch wrote in a recent report.
Key challenges facing the sector include this year’s introduction of the Financial Conduct Authority’s (FCA) ban on dual-pricing strategies, which 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.
Fitch expects the resulting tumult to result in lower margins for insurers in 2022 and into 2023.
However, the UK Treasury has proposed several reforms that will hold the regulator to greater accountability and impose greater transparency over regulatory processes, which could lead to reduced reporting requirements and lower barriers to entry for start-ups.
Additionally, Fitch expects the contribution from investment income to insurers’ profits to grow significantly in 2023, given the short duration of the investment portfolio and the improved reinvestment yields. Investment returns should therefore help to offset at least some of the negativity from the deteriorating macroeconomic environment and rising claims inflation.
For the London market specifically, Fitch’s sector outlook is neutral, as pricing keeps pace with loss cost increases and higher reinvestment yields help to offset the increasing pressure on margins from inflation.
“We expect pricing conditions to remain favourable in 2023 and profitability will continue to be supported by improved market discipline,” it concluded. “However, several challenges remain, including increasing economic uncertainty, falling asset values and inflation.”
