Rating agency A.M. Best’s outlook on the UK non-life insurance market is negative as intense market competition persists in the face of uncertainties from legislative changes and the impact of Brexit.
These factors account for a difficult operating environment and consequently A.M. Best forecasts earnings for non-life insurers could take a hit over the medium term.
However, the sector is well placed to withstand the challenges ahead with robust capitalisation and strong risk management capabilities, the rating agency believes.
Firms are advised to navigate the environment through differentiation and building a competitive advantage through more sophisticated use of data and technology.
The majority of business written by UK non-life insurers falls within the three classes of motor, liability and property: the motor segment has operated in a weak pricing environment for the last couple of years, in contrast to the property segment which has generated sub-100% accident year combined ratios in several of the past five years, buoyed by the absence of major wind and flood activity.
In addition, volatile reserve development over the past five years has weakened the UK non-life sector while unrelenting market competition has driven firms to sacrifice technical margins, driving pricing down to remain competitive with peers, and this shows no sign of abating.
Persistently low-interest rates also mean that insurers have struggled to boost earnings with non-technical operations.
2017 was a particularly challenging year for the non-life market segment, A.M. Best highlighted a number of factors that rocked the market, stating; “insurers had to contend with unrelenting price competition, an unfavourable change in the discount rate used to calculate lump-sum personal injury compensation, a further hike in insurance premium tax, and uncertainty related to the UK’s decision to leave the European Union (EU).”
A.M. Best believes the impact of these factors could last for the next couple of years, and although changes to the Ogden rate hike from the implementation of the Civil Liability Bill are on the horizon, any resultant benefits to insurers could be short-lived as over the medium term, insurers will have to pass on savings to policyholders through reduced premium rates.
A loss of passporting rights due to Brexit is unlikely to be a material issue for the UK non-life sector which writes mostly domestic business, however, a potential negative impact from Brexit on the UK economy will place a further brake on profitability with negative implications for insurance uptake, claims inflation, and premium volumes growth.
As seen within the broader re/insurance industry, its firms with economies of scale, diversification of business, disciplined underwriting and strong risk management that will be best placed to navigate the uncertainties ahead of the UK non-life segment.
A.M. Best advises firms to take a proactive response to the challenges with a dual strategy of stringent cost management and investing in digital technology and analytical tools to keep pace with and benefit from technological advances.
“Advancements in technology mean that pricing can be adapted and rolled out to price aggregators and sales platforms in a matter of minutes, with decisions not made by the executive management team at their next meeting, but instead inbuilt into pricing algorithms that automatically adjust hundreds of times a week.
“Insurers that have developed these increasingly sophisticated ways of doing business are well positioned to outperform their peers,” concluded A.M. Best.
