The UK non-life insurance market is facing a range of significant challenges which will make 2012-2013 ‘difficult’ for companies, according to Standard & Poors ratings services.
In its latest report on the market, S&P highlights key issues including the likelihood that reserve releases – recently the source of significant balance sheet strengthening – will ‘taper off’.
“Insurers released the reserve surpluses written in the early 2000s between 2007-2011, and these did much to support headline technical results,” it said. “In 2011, reserve releases were lower at £550 million than in 2010 (£1.1 billion) and 2009 (almost £2bn).
The industry’s ability to generate revenue through continued price rises has also been questioned by S&P. It pointed out that in 2010-2011, rates rose significantly across the motor market, in response to years of rising bodily injury claims; these had caused the industry wide combined ratio to peak at 120% in 2009-2010. Through tariff increases, the sector succeeded in reducing its combined ratio to 106% in 2011. However, rate increases for personal motor in 2012 to date have been more modest, at an average 5%-6%. To give this context, they rose by 3%-4% in personal property and by 1%-4% in commercial lines. Given that claims costs continue to rise, we expect the average motor combined ratio to be 105% for 2012, and the non-life average to be around 98%.
Time running out for flood agreement
Elsewhere in the industry, S&P pointed out how a new agreement remains in the balance over how flood cover is provided beyond June 2013; legal changes in April 2013 will seek to counter claims inflation in motor bodily injury lines; referral fees are to be outlawed; and the Competition Commission has set up an enquiry into the motor insurance sector. The changes are potentially positive for insurers, but significant uncertainties remain.
A spokesperson for the ratings agency added: “The increasing use of comparison websites to purchase personal lines is squeezing profit margins, the market is increasingly commoditised, and investment returns are likely to remain low. Because the U.K. non-life market is developed and mature, we expect future growth to be relatively slow. Two trends have supported results in recent years: reserve releases and tariff increases. However, these trends appear to be coming to an end. On top of relatively unfavourable industry fundamentals, this could make 2012-2013 difficult for players in the non-life market.”