AM Best sees ‘negative outlook’ for 2019 UK non-life insurance market

AM Best has maintained a “negative outlook” for the UK non-life insurance market as it is buffeted by economic and political uncertainty caused largely by Brexit.

Market analysts said insurers’ profit margins “are likely to remain under pressure in 2019” as a result of strong price-based competition.

Premium rates in the property segment have fallen despite rising claims costs, while rate improvements for motor, first seen in 2017, have “proved unsustainable”.

Analysts expect legislative changes introduced in the Civil Liability Act to “improve claims experience for motor and liability insurers” but in the current competitive market “much of the benefit is expected to be passed onto consumers” in price cuts.

The impact of Brexit uncertainty “is likely to have negative implications for UK non-life insurers’ investment earnings, claims inflation and premium volumes”, as the ongoing debacle “dampens growth prospects in the UK”. For example, real gross domestic product is predicted to fall to between one to two percent, depending on the manner and terms by which the UK exits the EU.

The strong competition that has eroded UK insurers’ profit margins in recent years shows no sign of abating, analysts warned, pointing to the likelihood of “lacklustre earnings” reported for 2018. Unsurprisingly, profitability is expected to “remain under pressure” in 2019.

In 2019, motor rates are expected to remain under pressure as a highly competitive market and claims inflation, due to a weaker pound, combine with higher replacement costs associated with hi-tech components. Analysts said this will “drive motor combined ratios back over 100 percent”.

Frequency and severe weather events, flood risk in particular, is the main driver of performance in property insurance, producing “volatile” prospective results.

Analysts said a weak pound, particularly against the euro, has led to an increase in repair costs.

Property insurance rates in 2019 are expected to remain “under pressure” despite claims inflation because of strong competition and the availability of relatively cheap reinsurance aided by telephone and internet sales and greater customer use of price-comparison websites.

AM Best said that it might revise its outlook to stable from negative if it saw evidence of an improvement in underwriting performance, supported by better technical pricing and the positive impact of legislative reforms, as well as reduced economic uncertainty.

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