Top 100 UK Insurers 2019: AM Best Commentary - Insurers well placed to withstand strong headwinds

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  • In 2018, the combined underwriting results of the largest 100 UK non-life insurers returned to profit in spite of an increase in weather-related losses
  • In the property sector, premium rates remain depressed, in spite of rising claims costs
  • Rate increases achieved for motor business in 2017 have proved unsustainable

The 100 largest UK-regulated insurers, ranked by non-life gross premium written, reported a combined underwriting profit in 2018, compared to a loss in 2017. Catherine Thomas, senior director of analytics in London at AM Best, explains how they achieved this against such a challenging backdrop.

The operating environment for UK non-life insurers remains difficult in 2019. Against a backdrop of strong competition, companies have had to contend with changes in the discount rate used to calculate lump-sum personal injury compensation, claims inflation due to higher repair costs and challenging investment market conditions driven by political and economic uncertainty. Results to date have benefited from benign weather experience, and the frequency and severity of weather-related events in the remainder of the year will be a key driver of final performance.

Motor insurers have broadly welcomed the changes to the personal injury compensation system in the UK set out in the Civil Liability Bill. The Bill received Royal Assent on 20 December 2018, becoming the Civil Liability Act 2018. Key measures in the government’s overall package include a tariff of compensation for whiplash claims, a ban on seeking or offering to settle whiplash claims without appropriate medical evidence and an increase in the small claims track limit for road traffic accident-related personal injury claims up to £5000 and for all other claims to £2000. The measures are not expected to come into force until 2020 but, if implemented successfully, should be a positive for insurers’ claims experience.

The Act also includes changes as to how the personal injury discount rate is set. The rate is now determined with reference to expected returns on a low-risk diversified portfolio of investments rather than very low-risk investments and is to be reviewed every five years. On 15 July, the outcome of the first review under the Act was announced, with the rate being revised from minus 0.75% to minus 0.25%. The change fell short of market expectations, as many participants had anticipated an increase into the 0% to 1% range, and a number of insurers announced the strengthening of motor and liability reserves.

UK insurers continue to invest significantly in digital capabilities and services, with an emphasis on improving the customer experience and reducing administration costs. In addition, systems are being designed to make better use of internal and external data to support better analytics and more competitive pricing.

Investments are expected to provide only a modest contribution to overall earnings this year, as low interest rates persist and financial markets remain volatile amid political and economic uncertainty. In general, UK non-life insurers pursue defensive investment strategies, with a focus on capital preservation. In search of higher returns, some have modestly increased their allocation to equities and lower rated corporate bonds, but low-risk assets, such as cash deposits and high-quality fixed-income securities, still dominate portfolios.

Uncertainty associated with Brexit pervades the UK economy and growth is likely to be muted in the short term. According to the International Monetary Fund, gross domestic product growth of approximately 1.5% is expected in the medium term, but economic growth forecasts vary widely depending on the manner and terms by which the UK exits the European Union. GDP growth in 2018 was positive but subdued at 1.4%.

From an operational point of view, AM Best rated UK-domiciled insurers are generally well prepared for Brexit and those that intend to underwrite European Economic Area business going forward have put in place arrangements to ensure that they are able to do so following a loss of passporting rights. For example, many companies have chosen to establish new EU-domiciled subsidiaries, especially where conducting cross-border business throughout the EU post-Brexit is a key concern (such as for Lloyd’s, the London market and other UK-based commercial insurers). For the retail non-life sector, a loss of passporting rights is not a material issue as most underwrite principally domestic business.

Nevertheless, all UK insurers will be affected by the impact of Brexit on the UK economy. While the effects are difficult to predict with any degree of certainty, they are likely to be negative, at least in the short term. Potential issues include a further weakening of sterling, which could increase claims inflation, and an increasingly challenging investment environment. In the event of a “no deal no transition” Brexit, investment markets are likely to be very volatile as prices adjust to that outcome. In addition, if economic conditions deteriorate, the demand for insurance is likely to reduce, with negative implications for premium volumes.

Most UK insurers have undertaken analysis to test the resilience of their capital positions to a range of disorderly and disruptive Brexit scenarios and, in some cases, have restructured investment portfolios or put specific hedges in place.

Performance of the 100 largest UK non-life insurers

The 100 largest UK-regulated insurers, ranked by non-life gross premium written, reported a combined underwriting profit in 2018, compared to a loss in 2017. This was in spite of an increase in weather-related losses.

The performance of individual market participants varied considerably and was largely dependent on the type of business underwritten. In general, the earnings of companies with London market operations improved, due to a lower, albeit still high, level of catastrophe losses in North America and Asia. In contrast, the technical results of insurers with material exposure to the UK property sector were negatively affected by higher weather-related losses.

In 2018, Aviva Insurance moved up one place to take the position of the UK’s largest company by non-life GWP, supported by growth in UK commercial lines. AIG Europe fell to second place. The company reported growth in its financial lines business in 2018, but this was largely offset by reductions elsewhere, particularly in its property and specialty risks portfolios. RSA and UK Insurance remained in third and fourth place respectively, and Aviva International, a reinsurance vehicle for the Aviva plc group, rose to fifth place. Intragroup reinsurance transactions have influenced the premium volumes and ranking of both Aviva and RSA companies in recent years.

UK insurers published their solvency capital requirements relative to eligible own funds under the Solvency II regime for the third time at year-end 2018. Overall, the industry is well capitalised but AM Best has observed significant differences in solvency ratios across the market. Drivers of this variance include the nature of business written, the capital strategies of insurance groups in respect of their subsidiaries and recent performance.

For some UK insurers, the need to strengthen bodily injury reserves in 2016 depleted capital and pushed their solvency ratios to a weak level. However, at year-end 2017 solvency ratios had largely recovered, in some cases due to capital injections. As at year-end 2018, the ratio of eligible own funds to SCR for the combined 100 largest companies was at a similar level to year-end 2017 at just over 160%.

top 100 2019 chart

Property

The accident-year loss ratio for the UK property sector deteriorated by six points in 2018 due to a combination of lower prices and higher claims costs. Weather-related losses were up on the previous year due to the impact of the
so-called ‘Beast from the East’ and storms Eleanor, Emma and Callum. In addition, the number of subsidence claims increased following an exceptionally dry summer. Escape of water claims and associated repair costs remain a major issue for the sector and have been a focus of insurers’ remedial actions.

In spite of claims inflation and two consecutive years of accident-year losses, property rates remain under pressure due to strong competition and the availability of relatively cheap reinsurance. Competition is largely price driven, particularly in the household sector, where barriers to entry are low due to a bias towards telephone and internet sales and the increased use of price comparison websites. For small commercial risks, e-trading is becoming widespread and price-based competition in this market is increasing.

Performance in the property sector is volatile, driven by the frequency and severity of weather-related events, and flood risk in particular. In the first half of 2019 claims experience was down compared to the same period last year in the absence of major weather events.

Maintaining the availability of affordable insurance for flood-prone properties has been a key challenge for the industry. To this end, Flood Re was launched in April 2016 as a not-for-profit reinsurance scheme supported by a levy on all policyholders. There are now 64 insurers ceding policies to the scheme, equivalent to 94% of the UK home insurance market. The absence of large flood losses in its first three years of operation has allowed the scheme to build up its financial resources, and at 31 March eligible own funds under Solvency II stood at £349m (2018: £210m).

Motor

The competitive UK motor sector has a volatile performance record on both an accident and calendar-year basis, most recently due to the impact of fluctuations in the personal injury discount rate on reserves and pricing. The sector saw material reserve strengthening following the announcement by the UK government in February 2017 to reduce the personal injury discount rate to minus 0.75%. Most motor insurers reflected the reserve charge in their 2016 results, pushing overall earnings for the year deeply into deficit.

In 2017, the prospect of higher claims costs for personal injury claims spurred insurers to increase prices, with positive implications for underwriting earnings. However, rates fell back in 2018 as insurers anticipated cost benefits from planned reforms to both the discount rate and whiplash compensation.

This year, insurers are facing higher claims costs but premium rates are struggling to respond in an intensely competitive market. Vehicle repair is becoming more expensive due to increased use of technology and the impact of a weaker pound on the price of imported parts. The number and cost of theft claims is also up, partly due to keyless car crime.

The cost of third-party bodily injury claims continues to weigh on motor insurers. Key measures in the Civil Liability Act, such as whiplash-related reforms, are expected to be implemented in 2020 and should reduce the cost of bodily injury claims in the UK. However, in such a competitive market, any savings are likely to be passed to insureds in the form of premium reductions.

The Civil Liability Act also includes provisions related to the review and setting of the personal injury discount rate. The outcome of the first review under the Act was announced in July 2019 with the rate being revised to minus 0.25% from minus 0.75%. The change disappointed many market participants as they had predicted an increase to within the 0% to 1% range and led to some strengthening of bodily injury reserves.

Liability

The long-tail nature of liability business means that reserve movements tend to make a material contribution to overall results. In 2016, and to a lesser extent 2017, calendar-year results were affected by reserve strengthening associated with the reduction in the personal injury discount rate. On an accident-year basis, the sector has reported combined ratios in excess of 100% in four out of the past five years.

Claims for industrial disease, particularly noise-induced hearing loss, remain elevated, but appear to be falling following a steep rise between 2011 and 2014. UK non-life insurers have also reduced their exposure to these long-tail claims with the transfer of historical liabilities to run-off specialists.

In recent years, insurers that have chosen to dispose of their latent UK liability reserves include Aviva, QBE, Axa and RSA. Deals have been driven by the introduction of Solvency II and more prevalent use of capital models, which have increased insurers’ focus on the most efficient use of capital. In general, AM Best notes that insurers are looking to redeploy capital from the run-off of long-tail reserves to potentially more value-added activities, such as writing new business.

Conclusion

In 2018, the combined underwriting results of the largest 100 UK non-life insurers returned to profit in spite of an increase in weather-related losses. Risk-adjusted capitalisation for most companies remained at a robust level.

This year, competition in the UK non-life market remains intense and underwriting earnings are under pressure. In the property sector, premium rates remain depressed, in spite of rising claims costs. Meanwhile, rate increases achieved for motor business in 2017 have proved unsustainable as insurers anticipate cost benefits of measures outlined in the Civil Liability Act. Planned changes to the personal injury compensation system should be positive for claims experience. However, AM Best notes that reforms are still to be implemented and there is considerable uncertainty as to what impact they will have on the frequency and severity of bodily injury claims.

In spite of recent performance pressures, UK non-life insurers are generally well capitalised. As at year-end 2018, the 100 biggest insurers’ combined SCR ratio stood at over 160%, although ratios vary considerably across the market. Over the next 12 months, insurers will have to contend with strong competition, uncertainty related to legislative changes and the impact of any fallout from Brexit on the economy, demand for insurance and claims costs. In AM Best’s view, the currently robust capital adequacy of most UK non-life insurers positions them well to withstand these headwinds.


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