The UK insurance market is facing a deteriorating outlook for the year ahead as inflation and pricing rules weigh heavy on the market’s performance

Credit rating and research firm Fitch Ratings has today (29 November 2022) published its sector outlook for the UK non-life company market in 2023 - it described this sector as deteriorating.

In comparison, the agency noted that the London market’s outlook for next year is neutral.

Fitch Ratings said these diverging sector outlooks reflected the different credit profiles of the two sub-sectors of the UK non-life insurance market.

The firm explained: “The deteriorating sector outlook for the UK non-life company market is driven by our view that the introduction of general insurance pricing practices [regulation], high claims inflation [and] normalising claims frequency [post-pandemic], coupled with [a] significant lag in pricing corrections driven by strong competition in the sector will put downward pressure on earnings in 2023.”

The outlook’s author - Graham Coutts, senior director at Fitch Ratings - continued: “Fitch expects UK non-life insurers’ profitability to deteriorate in 2023 as premium rate increases significantly lag behind claims inflation in both home and motor insurance.”

London set to succeed?

On the London market, however, Fitch Ratings said: “Fitch’s sector outlook for the London insurance market is neutral, as pricing [is keeping] pace with loss cost increases and higher reinvestment yields help to offset the increasing pressure on margins from inflation.

“We expect pricing conditions to remain favourable in 2023 and profitability will continue to be supported by improved market discipline.

“However, several challenges remain, including increasing economic uncertainty, falling asset values and inflation.”

Coutts added: “We believe London market insurers will be able to offset the challenging economic outlook due to strong pricing improvements and increasing reinvestment yields.”

Potential benefits in 2023

Fitch Ratings did report some positive news for the UK insurance market in 2023.

For example, “despite the challenges of inflation and pricing, Fitch [Ratings] believes that results in 2023 will benefit from rising interest rates, which will boost investment returns and partly offset the tougher underwriting environment”, the outlook stated.

“We also believe that many insurers built up excess reserves during the low claims experienced in 2020 and 2021 and [we therefore] expect insurers to use these excess reserves to smooth some of the losses expected in 2023.”

Fitch Ratings added that the London market’s efforts to modernise were increasingly vital for its future.

It explained: “With significant efforts to reduce costs over the past four years, expense ratios have been reducing, although they are still high.

“The ability of the Future at Lloyd’s strategy to meaningfully reduce expense ratios in the short term is yet to be proven. However, we expect it to provide benefits to the market in the medium term.

“Lloyd’s has continued to make progress with [the] digitisation of most market activities and once fully implemented, the operational efficiencies could result in savings of around £800m, or around 3% of total operating cost across the market.”