Global credit rating agency AM Best has published a new market segment report for UK non-life insurance in which it maintained its negative outlook due to factors such as inflation and volatility from weather-related events.
In “Market Segment Outlook: UK Non-Life Insurance,” AM Best noted: “Factors that support the continued negative outlook in 2022 include expectation that high levels of general inflation will prevail over the medium term, driving up claims costs; ability of motor insurers to increase rates to offset the impact of claims inflation constrained by strong competition; exposure to weather-related events, especially flood risk, subjects property lines to volatility; and investment results are likely to be affected by volatile macro-economic conditions.”
On the flipside, the rating agency said the abovementioned negatives are being moderated by the continued positive rate momentum in commercial lines, as well as how insurers are adapting to the personal lines pricing reforms.
Over the medium term, according to AM Best, high levels of inflation are likely to prevail. Mostly to blame are supply chain disruption, labour shortages, and rising energy prices.
“Initial expectations that a spike in inflation would be a short-lived result of re-opening the economy following lockdowns appear to have been optimistic,” wrote the rating agency, “with the conflict in Ukraine exacerbating underlying macroeconomic factors.
“Inflation is likely to drive an increase in claims costs, due to the rise in the replacement cost of underlying parts and increased labour costs. The ability of insurers to weather these increased costs will depend on their ability to achieve commensurate rate rises, which may be supressed by high levels of competition in the personal motor and household sectors.”
Meanwhile, the increased cost of living in the UK could also reduce consumer demand for insurance.
AM Best added: “The fallout from the conflict in Ukraine, and the international sanctions imposed on Russia, could have a negative impact on UK non-life insurers, mainly through indirect economic impacts. The majority of UK-domiciled non-life insurers write only domestic business and are unlikely to have material exposure to Russian investments or reinsurance counterparties.
“However, negative economic impacts are already emerging. Equity markets are likely to remain volatile, and supply chain disruption and further rising energy prices are driving inflation up further. The cyber insurance market is also exposed to elevated risk as a result of the conflict. Although UK non-life insurers typically write low-limit policies with war and terrorism exclusions, losses could accumulate and policy wordings may be tested in the case of a major cyber event.”
When it comes to motor lines, which generate about a third of UK non-life premium income, it is AM Best’s expectation that claims inflation will continue to exceed rate rises this year. Meanwhile property lines, which similarly make up around one-third of non-life premium income in the UK, are poised to face volatility due to their weather-related risks exposure.
As for commercial insurers, they are expected to keep benefitting from rising premium rates, while personal lines insurers with strong brands and a positive customer experience are forecast to benefit, in the longer term, from the implementation of the new rules on pricing practices.
“A negative market segment outlook indicates that AM Best expects market trends to have a negative influence on companies operating in the market over the next 12 months,” explained the rating agency. “However, a negative outlook for a particular market segment does not mean that the outlook for all the companies operating in that market segment will be negative.”
