Analysts at Fitch Ratings have explained that their sector outlook for the UK non-life London market is improving for 2024, with price increases and higher reinvestment yields expected to offset claims inflation.
The rating agency also says that demand should not be much affected by the economic slowdown.
At the same time, combined ratios are also showing improvement, driven by strong pricing trends and actions that have been taken to remediate the underperforming classes of business since 2018.
The agency explained that it expects the positive pricing momentum to be maintained into 2024. Premium rate rises have continued in 2023, with a number of insurers reporting double-digit rate increases in H123.
Importantly, these improvements come off the back of existing positive rate movement, following large pandemic losses witnessed in 2020, as well as big natural catastrophe losses – in particular from Hurricane Ian in 2022 – and worsening experiences on the cyber insurance business.
The agency also highlighted inflation pressures.
“Margin pressure in property (re)insurance lines may emerge if price rises do not keep up with repair and construction cost inflation. Long-tail casualty lines may also suffer due to the compounding effect of multi-year inflation, magnifying the effects of social inflation, which triggered significant casualty and liability reserve strengthening and price rises from 2018 to 2020,” Fitch wrote in a recent report.
Moreover, the agency also stated that it expects investment returns to strengthen in 2024 given the fairly short duration of the bond portfolios, and the considerable improvement in reinvestment yields.
If you recall, London market insurers were struck by unrealised losses on their bond portfolios in 2022.
However, as Fitch explains, most of the investments are held to maturity so that mark-to-market losses will unwind as bonds mature, which is set to provide a “big boost” to earnings in 2023 and 2024.
Lastly, the agency highlighted how with great efforts to reduce costs over the past four years, expense ratios have managed to fallen, although they still remain high.
“The ability of the “Future at Lloyd’s” strategy to meaningfully reduce expense ratios over the short term has yet to be proven, although there have been some improvements,” it concluded. “Lloyd’s has continued to make progress with the digitisation of most market activities and, once fully implemented, the operational efficiencies could result in large savings across the market.”
