In March, Fitch Ratings revised its sector outlook for the UK non-life company market from stable to negative, and now the credit rating agency has warned that 2018 isn’t looking any better.
“The 2018 sector outlook remains negative, reflecting our expectation that intense competition, increasing use of price comparison websites, and low investment returns will continue to pressure insurers’ earnings in motor and household insurance,” explained Fitch, which made the March 2017 revision following the change in the Ogden rate.
It said the alteration of the personal injury discount rate significantly reduced 2016 earnings because insurers had to set aside more reserves in order to cover higher costs of outstanding bodily injury claims. The decision also impacted the cost of motor excess of loss reinsurance.
“We expect motor insurance pricing to remain flat in 2018 with possible small increases to reflect claims inflation on accidental damage, driven in part by the higher costs of replacement vehicle parts due to the weaker pound and greater complexity of cars,” noted Fitch. “Motor insurance premiums rose sharply in 2017 in response to the government’s decision to lower the Ogden discount rate to -0.75% from 2.5% in February 2017.”
Now while the UK government has since published draft legislation proposing a 0%-1% Ogden rate, the credit rating agency stressed the “unclear” implementation timing.
“Another regulatory initiative – whiplash reform – is also likely to be delayed,” it added. “The implementation of this could be deferred into 2019 from October 2018 because of Brexit crowding out parliamentary time.”
Without these regulatory reforms, Fitch said it does not expect motor premiums to fall.
“Until insurers have a high degree of certainty around any proposed changes, they will remain cautious about pricing-in any positive developments,” it stated. “Previously the sector overestimated the benefits of the Legal Aid, Sentencing and Punishment of Offenders (LASPO) reforms and substantially reduced premiums, which had contributed to the sector’s underwriting losses.”
As for household insurance premiums, they are forecast to remain “broadly flat” in 2018 in the absence of large weather events. Fitch – which said the growing use of price comparison websites is adding to the already intense competition within the household insurance market – noted that any significant weather-related losses would likely push premiums up.
“New renewal transparency rules, which were introduced by the Financial Conduct Authority in April 2017 and require insurers to show prior year’s premiums next to the renewal quote, could add further pressure on margins as retention rates could fall if customers opt to shop around for cheaper coverage,” explained the credit rating agency. “The Insurance Premium Tax (IPT) increased to 12% in June 2017 from 6% in 2015 and, in some lines, insurers have struggled to pass the increase on to consumers because of intense price competition.”
Meanwhile investment returns are expected to remain subdued in the coming year.
“Despite interest rate increases in the UK and the US, rates remain very low and we project that yields on fixed income securities, the main asset class for company market insurers, will stay low in 2018,” predicted Fitch.
Related stories:
What will the new Ogden rate mean for insurers’ earnings?
Major European reinsurers can now breathe a sigh of relief
.jpg)
