Results season will be upon us soon, and EY shares what it believes we’ll most likely see when the reports start coming in.
Needless to say, leaving the European Union is a major part of the narrative, especially since the government has made it clear that “the UK can no longer operate under the EU’s ‘passporting’ regime, as this is intrinsic to the Single Market of which it will no longer be a member,” as stated in the whitepaper it released earlier this month.
Commenting on the market outlook ahead of the deluge of financial results, EY UK insurance leader Rodney Bonnard – who called it “a mixed year” – said Brexit plans will inevitably be a key focus.
“While many UK-headquartered insurers are advanced in their Brexit activity, more action is needed to ensure intermediary plans are developed and connected in parallel to ensure there is no interruption to trade flows between the EU27 and UK in the event of a ‘no deal’ scenario,” noted Bonnard.
“In particular, life and pensions firms are considering how they will continue to service policyholders who have moved overseas – the so-called ‘migrating policyholder’ issue,” he said. “This may result in a new flow of subsidiary applications to support contract continuity, unless there is an imminent political or policy solution to address the issue.”
As for the UK motor insurance market, EY expects consolidation and convergence to continue as dominant themes, with Bonnard citing “attractive” growth, profit, and cost efficiencies opportunities. He noted: “The UK motor insurance market achieved strong underwriting profits in 2017 – the best result in nearly 15 years – but the market is now softening markedly, with premiums down in 2018 as more profitable firms seek to grow their market share.
“The market is also beginning to price in the reduction in claims costs expected from the Civil Liability Bill’s whiplash and Ogden reforms, leaving them exposed to the risk these are delayed or deliver less benefit than anticipated.”
In addition, according to the insurance leader, optimism that the Ogden discount rate will be increased next year means those who took a prudent position in their 2016 results are now well placed to free up some of their reserves.
In terms of home insurance, meanwhile, Bonnard said premium demand has been hit by the ratio of average house prices to income remaining close to a record high through last year and so far in 2018. Premiums rose less than 2% over the course of 2017.
Specialty insurers, on the other hand, are likely to be the bearer of bad news.
“The current picture isn’t very rosy among specialty insurers, who suffered the costliest year on record in 2017,” explained the EY executive, who said the Lloyd’s Market expects to pay out £4.5 billion in major claims due to last year’s significant catastrophe events. In fact, return on capital at Lloyd’s fell to -7.3% in 2017 from 8.1% the previous year.
“This seems to have been a peak however; the first half of 2018 has been benign in terms of catastrophe activity, and forecasters are predicting a return to normal levels of hurricane activity for the rest of the year,” said Bonnard. “Even so, rates have only risen modestly throughout 2018 to date, so we expect the market to have a high degree of focus on the quality of earnings and, in particular, the performance of the ex-catastrophe loss ratios.”
