Factors such as general inflation, increased claims costs and flood risk have contributed to the negative rating

Credit ratings agency AM Best has this week announced that it would maintain its negative outlook on the UK’s non-life insurance sector for the coming year.

As defined by the agency, a negative outlook indicates that AM Best expects overall market trends to have a negative influence on companies operating within the sector over the next 12 months.

This does not mean that the outlook for all companies within the sector will be negative, clarified AM Best.

It predicted that high levels of general inflation in the UK will drive up claims costs, while the ability of motor insurers to offset claims inflation with rate increases is expected to be curtailed by strong market competition.

AM Best further believes that property lines will experience volatility in the year ahead because of exposure to extreme weather events, especially floods. Meanwhile, investment results are likely to be negatively impacted by “volatile macroeconomic conditions”.

Impact of inflation

AM Best added that its initial expectations that a spike in inflation would be short-lived now “appear to have been optimistic, with the conflict in Ukraine exacerbating underlying macroeconomic factors”.

The agency noted that inflation was likely to drive up claims costs because of resultant rises in the cost of replacement parts and labour.

The impact of inflation on the cost of living was also referenced as a factor that could negatively impact the insurance industry.

Cost of living rises “could diminish consumer demand for insurance, as rising household bills deplete disposable income that may otherwise have been used to purchase insurable goods”, explained AM Best.

Volatile weather

The impact of storms Dudley, Eunice and Franklin, which hit the UK in February 2022, were noted by AM Best as likely “to lead to claims costs in the hundreds of millions”.

It explained that this impact stood in contrast to the UK’s adverse weather experience in 2021, which was “relatively benign”.

According to AM Best, property lines generate nearly one-third of the UK’s non-life premium income, therefore weather related events – especially floods – can generate considerable volatility for property insurers’ results.