Reserves from hard market have been used up, says analyst

AM Best has warned of a tough year for UK non-life insurers as the ability to top up losses from unused prior year reserves dries up.

The industry has knocked between 5.6 and 7.5 points off its combined ratio by using reserves in the past five years.

AM Best also warns of low investment returns and the uncertain effects of the economic downturn on claims experience.

Its analysis said:

  • The broad-based rate increases that emerged in 2009 are expected to continue throughout 2010, with the largest movements in the motor sector.
  • Price improvements should counter an anticipated increase in claims experience, leading to better accident-year performance.
  • However, calendar-year results are not expected to improve, with prior-year reserve redundancies expected to reduce.
  • To date, recession-related loss experience has been below A.M. Best’s initial expectation, but it is unlikely that insurers have yet experienced the full impact of the economic downturn on claims frequency and severity.
  • Low fixed income returns mean insurers cannot rely on investment earnings to offset weak underwriting performance, which should further increase insurers’ focus on technical pricing and expense control.
  • The implementation of Solvency II is fast approaching and consuming a significant amount of U.K. insurers’ time and resources.

Bodily injury claims

AM best said: “In 2009, the contribution that prior year profits made to insurers’ combined ratios was lower overall, suggesting that reserve surpluses have diminished from previous high levels. In the motor sector, the drop was partly due to deterioration in third-party bodily injury claims.

“Faced with the prospect of reduced prior year releases, as well as the threat of recession-related claims activity and lower investment income, insurers are taking action to improve accident year performance. This has resultedin widespread rate increases in 2010.

“However, questions still remain over whether these price improvements will be sustainable. The U.K. non-life market remains highly competitive and insurers will find it difficult to maintain upward rate momentum without sacrificing market share.

New business

“Furthermore, reported increases on renewal can be a misleading guide to overall rate adequacy as there is still a material gap in price between new and renewal business.”

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