Could the PRA soon be knocking on personal lines insurers’ doors?

Scott McGee_News Editor_Insurance Post

Editor’s View: 2022 was tough for personal lines, but if you are an insurer who had a particularly difficult year, the Prudential Regulatory Authority could soon be knocking on your door.

If you were to look through the financial reporting statements of personal lines insurers for 2022, a fairly common theme would start to show.

Many insurers and brokers saw combined operating ratio surpass 100%, with most of them attributing that to “unprecedented” external factors such as inflation and weather.

Insurer results

Axa UK’s COR went from 95.6% in 2021 to 101.1% in 2022, attributing it to “higher inflation, higher natural events, less favourable prior years’ reserve development and higher motor claims frequency”.

Allianz Holdings saw operating profit reduce by 58% in 2022 due to inflation and severe weather events, while combined operating ratio increased six percentage points to 99.2% compared with 2021.

Meanwhile, Aviva saw its COR hit 96.1%, saying a “tough year in personal lines” was mostly offset by a good year within its commercial business.

But the worst hit were companies such as Direct Line, RSA, Saga, Esure and Covea, all of whom hit the news lately for actions taken as a result of their struggling personal lines businesses.

RSA’s personal lines business posted a full-year combined ratio of 106.2%, which included 8% of elevated weather-related losses.

Since the results were released, RSA announced it is selling its personal lines motor book, which performed at a combined ratio in excess of 100% in recent years, to Ardonagh.

Direct Line Group posted a pre-tax loss of £45.1m for 2022 compared with a £446m profit in 2021, representing a 110.1% reduction in fortunes.

Meanwhile, operating profits fell 95% to £32.1m (2021: £590.3m), which bosses said reflects a “volatile operating environment with elevated motor claims inflation, higher than expected weather event claims, new regulatory changes, and challenging investment markets.”

As a result, it scrapped its final dividend and chief executive Penny James stepped down.

Saga’s underwriting business reported underlying combined operating ratio of 125.8% compared with 96.3% in the prior year. Saga confirmed it is in the process of selling its underwriting business.

Esure posted a £29.1m loss for 2022 with bosses blaming significant claims inflation, a weak pricing environment, increased weather-related home claims, plus motor claims going back to pre-Covid levels.

Finally, Covea UK posted a loss of £145.5m, partly due to the “cost of claims due to the winter freeze event.”

As a result, the insurer has entered a restructuring exercise within parts of the business, putting a number of jobs at risk.

I am sure there are others who also suffered, but you get the point: 2022 was very difficult for personal lines insurers.

Tales of the unexpected

Inflation has been around for a long time. Aviva was talking about inflation back in 2019, Hastings spoke about rising claims inflation back in 2018, and in 2020, law firms RPC and Hinshaw and Culbertson warned that UK insurers could face “US-style inflation”.

While inflation continues to be an issue, it is not a new one. Extreme weather events are nothing new either.

According to the Met Office website, there were severe weather events every year for at least the past decade. Just from memory, I can remember the ‘Beast from the East’ in 2018, severe flooding every year, storms, record-breaking heatwaves in the summer, and so on.

While 2022 may have been a year full of extreme weather with the February floods, hot summer and December freeze event, realistically, some insurers need to take a long hard look at the way they work and realise their risk management operations were not up to scratch.

Why worry about the PRA?

Back in October, the PRA issued a £9.7m fine to MS Amlin Underwriting.

In the final notice, the PRA stated the insurer breached fundamental rules five and six. This means MS Amlin did not have “effective risk strategies and risk management systems” and did not “organise and control its affairs responsibly and effectively”.

A PRA spokesperson told Insurance Post that it does look at “risk management and governance” as part of its supervision of banks and insurers.

It also states in the final notice that a reason for action was due to the significant losses the firm reported for 2017.

It said: “MSAUL experienced significant losses in 2017, reporting a loss of £45.332m for Syndicate 3210 and a loss of £499.7m for Syndicate 2001, with total losses therefore of £545.032m.”

This could mean the PRA will start to look into a firm if it sees negative results, such as those of the personal lines firms mentioned earlier.

While the PRA did not say whether or not it is looking into these firms, do not be surprised if you start receiving calls from the PRA if your losses were “due to unexpected weather” in 2022.

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