Moody’s Ratings has revised its outlook for the UK property & casualty (P&C) sector to stable from negative, which the agency attributes towards P&C personal lines cover, such as motor insurance, rising sufficiently to absorb claims inflation.
The agency also noted that its outlook for the UK life insurance sector remains stable, with assets under management holding steady as strong pension risk transfers and workplace pension contributions offset subdued retail inflows.
According to data from the Association of British Insurers (ABI), P&C personal lines prices increased by 25% in 2023, and together with moderating claims inflation, this is expected to support underwriting profitability over the next 12-18 months.
“However, with competitive pressure on prices building up again, profitability may come under renewed strain if claims inflation proves more persistent than expected,” Moody’s said.
“Commercial lines price growth has slowed or reversed in some segments, but remains supported by indexation in others, and should continue to drive strong results over the medium term. With commercial lines accounting for over 60% of total UK P&C premiums in 2023, this will feed through into strong marketwide combined ratios.”
In addition, Moody’s noted that higher interest rates are expected to support profitability.
The rating agency added: “While the UK interest rate cycle has turned, rates remain comparatively high and will continue to boost insurers’ investment income and profitability. Higher rates have also improved pension scheme funding, allowing more companies to transfer their defined benefit pension liabilities to life insurers via bulk purchase annuities. Pension risk transfer volumes hit a record £49 billion in 2023 and market participants expect a further increase in 2024 and 2025. Bulk annuities will remain a key contributor to active insurers’ earnings.”
Meanwhile, it also appears that capitalisation remains strong, but is market-sensitive for the life sector. This is due to UK life insurers posting strong solvency ratios of around 189% in Q1 2024, which are likely to decline as they redeploy surplus capital into bulk annuity deals.
The agency stated that their capital is also sensitive to falling interest rates, property asset devaluations, and increases in investment grade credit defaults.
Elsewhere, UK P&C solvency ratios saw a notable improvement in Q1’24, increasing to 197% from a recent low of 177% in Q1′ 22, with the increase reflecting profit retention and in the case of some major firms, capital injections.
Furthermore, the agency stated that increased contributions to claims reserves related to long-tail risks are a “headwind” for commercial P&C insurers’ profitability and capitalisation.
Moody’s also expects the earnings contribution from reserve releases to fall for personal lines insurers, however their reserve adequacy should improve beyond 2024.
The agency also highlighted that reserving pressure could begin to ease in the months ahead for motor and liability insurers, due to a widely expected increase in the Ogden rate, used to discount lump sum compensation payments to bodily injury victims.
And lastly, with weather related claims hitting a record high in 2023, with buildings subsidence adding to losses from floods and storms, primary P&C insurers are expected to retain more catastrophe risk than in recent years as reinsurers raise their prices and tighten their contract terms, Moody’s concludes.
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