Credit ratings agency identifies the key factors that are contributing to market outlooks in the UK

The UK non-life company market, which excludes Lloyd’s and the London market, has a ‘worsening’ sector outlook compared to 2020, according to credit ratings agency Fitch Ratings.

Graham Coutts, the firm’s senior director and head of EMEA reinsurance, emphasised “that 2021 is likely to be less profitable than 2020” and “whilst there might be some frequency benefit in 2021, it won’t match the benefit that we saw in 2020”.

Coutts was speaking at Fitch Ratings’s ‘Ask the Analysts: UK Non-Life Insurance’ webinar on 27 January.

Outlining the financial lay of land for the UK market, he said: “In the UK non-life company market, our sector outlook is worsening.

“Looking at 2020, that was actually a fairly profitable year. Certain lines, particularly motor, benefitting from reduced claims frequency and that was really due to those various lockdowns and tier restrictions throughout the year.

“The starting point is that 2021 is likely to be less profitable than 2020, so we do expect that whilst there might be some frequency benefit in 2021, it won’t match the benefit that we saw in 2020. And that’s due firstly to the roll out of the vaccine – that should mean at some point an easing of lockdown restrictions and tier restrictions and then a return to activity levels similar to pre-pandemic, and that would also mean a return to pre-pandemic claims frequency.

“The speed that we can return to that level of normality remains an open question and one of the key downsides we see, any problem with the vaccine rollout or strains that become resistant to the vaccine, which could mean that we remain under social distancing and remote working conditions for even longer.”

Impacting the outlook

Aside from the Covid-19 pandemic, Coutts identified a number of other factors that are also influencing the companies market sector outlook.

He continued: “Firstly, there’s a high level of regulatory scrutiny and, in particular for the company market, the FCA’s new fair pricing rules. They’re likely to dent profitability and perhaps even alter distribution strategies.

“On top of that, we have elevated claims inflation [and] price competition - all that puts substantial pressure on stability.

“We also have the low interest rate environment. Less of an issue for the non-life [sector] than it is for the life sector given the short duration of the portfolios, but nonetheless that low return on investments means that profitable underwriting remains the key focus for insurers.”

Coutts also touched on “soft pricing for both household and motor”.

He added: “2020 was quite a profitable year for insurers, so there’s limited scope for them to be raising prices dramatically like you’re seeing in the London market.

“We still feel there’s intense competition in the sector and strong capital levels as well, so given a strong year in 2020, I believe some insurers might want to be more aggressive with their strategy for 2021 to try and gain market share. That probably means that pricing will remain weak.”

London success story

On the other hand, Fitch Ratings calculated that the London market has an ‘improving’ sector outlook compared to 2020, said Ekaterina Ischenko, director of EMEA insurance at Fitch Ratings.

This is mainly driven by strong pricing and underwriting performance improvements, as well as the impact of Lloyd’s Blueprint Two plans, which will have a positive effect on cost efficiency.

The primary challenge in the London market remains the coronavirus pandemic, as the ultimate costs for Covid-19-related claims are still unknown. Ischenko described these losses as still being in the “development stage”, noting insurers Beazley and Hiscox as being affected.

She observed that pandemic-linked claims are mainly for business interruption or event cancellation – she predicted that event cancellation claims are likely to continue into 2021 and that there also might be an increase in third party liability claims, which typically take longer to materialise and settle.

Cyber risks

Ischenko additionally outlined a juxtaposition when it comes to cyber risks – organisations are increasingly seeing this as an essential product, however insurers are becoming more “cautious” about writing the cover.

She explained: “It is fair to expect that in [2020/2021] there will be more claims related to cyber as many companies move to remote working, which open [them] up to additional risks. We see the demand for cyber is increasing; many companies now see that as a much more important product for themselves.

“At the same time, insurers are probably even more cautious now than before about writing cyber, given its systemic nature.

“The main problem for cyber still remains – there is still not sufficient data for insurers to model cyber risk and to price it correctly. There have been some developments with market participants trying to organise a database, but I think it’s still very much in the development phase.”

Furthermore, Ischenko believes that broker consolidation in the insurance sector overall is “not great news”.