What is the most profitable line in UKGI?

The UK general insurance (UKGI) market continues to face a number of challenges, with tough economic conditions, rising inflation and a changing regulatory regime all contributing to the uncertainty that has engulfed the industry.

So, what have these changes meant for profitability in the sector? And which business lines are delivering the most profits for insurers?

Ahead of the release of the 2023 Insurance Times Top 50 Insurers research report next month, Insurance DataLab has exclusively analysed the latest release of regulatory returns to answer these questions.

And, on the surface, the news seems positive, with UK insurers reporting an aggregate underwriting profit in each of the last five years.

Margins remain tight, however, with the market reporting an aggregate combined operating ratio (COR) of 99.9% across all lines of business in 2022, with only around two-fifths of insurers reporting underwriting losses in their latest Solvency and Financial Condition Reports (SFCRs).

This aggregate position marks a 1.7 percentage point worsening on the previous year’s 98.2% ratio, which made 2021 the most profitable year of the last five.

Delve deeper into the numbers, however, and there are areas of the market that are facing some serious issues.

The motor insurance market, which continues to be the second largest line in UKGI with gross written premium (GWP) of £10.9bn in 2022, has been particularly problematic for insurers.

Motor market murmurs 

Net claims incurred across all motor insurers rose by more than 10% in the last year – despite a fall in retention rates – as insurers ceded more premiums to reinsurance markets.

This meant that insurers faced net motor claims worth in excess of £5.9bn last year – the highest levels seen in the market since 2018 when net claims totalled a little under £6.3bn.

These inflationary pressures led to a significant increase in the loss ratio, which rocketed to 77.8% for 2022 – a jump of 10.3 percentage points year-on-year.

Indeed, this is the highest loss ratio for any line of business across the last five years, with motor insurers struggling to get to grips with claims inflation.

Rising operating expenses have also dented motor profitability, with the market reporting a 2022 expense ratio of 34.0% – a 1.3 percentage point increase on the previous year and the highest expense ratio of the last five years.

This drove the motor market even deeper into loss making territory after its aggregate COR rose 11.6 percentage points to 111.8%, making it the most unprofitable business line in UKGI.

These pressures have led some insurers to withdraw from certain areas of the motor market, with RSA exiting personal lines business in March of this year and Zurich revealing in July that it planned to withdraw from regional and national panel broker distribution channels for its personal lines home and motor business.

When announcing its decision, RSA said this departure would lead to the loss of £120m of annual revenue, although as this book of business was operating at a COR significantly above 100%, the overall impact on profitability should be positive.

Property portents

The property market – which brought in premiums totalling more than £12.9bn in 2022 – has also posed problems for insurers, with the rising cost of parts and labour piling intense inflationary pressure onto the market.

UK property insurers reported an aggregate COR of 105.8% for 2022, making it the third consecutive year in which the market has fallen to an underwriting loss.

Indeed, this latest set of results means that property insurers have failed to report an aggregate underwriting profit in four of the last five years, with 2019 the only profitable year over this period – COR sat at 99.4% in this year.

Much of this worsening performance has been driven by rising claims costs, with the aggregate loss ratio climbing by 7.2 percentage points over the course of last year to hit 62.6% – the highest loss ratio since 2020, when it stood at 63.1%.

Property claims broke through the £5bn barrier for the first time in this analysis last year, with net claims incurred totalling £5.2bn for 2022 – up 23.5% on the previous year, when losses totalled less than £4.2bn.

The increasing threat from our world’s changing climate will also have played its part in pushing up these losses, with research from Swiss Re revealing that global insured losses from natural catastrophes rose to $125bn (£98bn) in 2022 – up from $121bn ($95bn) a year earlier – as losses remain well above the 10-year average of $81bn.

And the pressure being faced by property insurers is not going to let up anytime soon.

If anything, the situation was made worse in January when property reinsurance rates rose close to a 20 year high, with rates for some loss-hit portfolios rising by 100%. For loss-free portfolios, global risk-adjusted property catastrophe rates were still up 20‒50% on the previous year, according to Swiss Re.

There has been some good news for property insurers, however, with the aggregate expense ratio improving by 3.8 percentage points to 43.1%.

This is the lowest property expense ratio of the last five years, although it does still sit 6.2 percentage points above the market aggregate across all lines of business.

Light on the horizon

But while UKGI’s two largest lines of business fell to underwriting losses last year, the rest of the market has fared considerably better.

General liability insurance – which, with £6.9bn of GWP is the third largest line in UKGI – reported an aggregate COR of 88.1% for 2022, placing it firmly in profitable territory.

This marks a 9.4 percentage point improvement on the previous year, when the aggregate COR stood at 97.5% – this improvement makes 2022 the most profitable year of this analysis for general liability insurers.

This performance was primarily driven by an improving loss ratio, which fell by 6.3 percentage points over the course of 2022 to 51.3% – down from 57.6% the previous year.

This came despite a 12.9% increase in net claims incurred, which rose to £2.3bn, the impact of which was more than offset by a 26.7% increase in net earned premiums to £4.5bn.

Operating expenses relative to premiums have also been improving, with the general liability expense ratio falling by 3.1 percentage points to 36.7%.

This is the lowest ratio of the last five years for the business line as it continues to benefit from a growing premium base.

Net earned premiums have grown by more 53% over the last five years, while GWP is up by more than 56% over that same period so that the general liability market is now worth more than 15% of the overall market in the UK.

Top spot

The award for most profitable business line in UKGI, however, goes to legal expenses insurance, which posted an aggregate COR of 69.5% for 2022 – it is worth noting, however, that legal expenses is the UK’s third smallest business line, with GWP of just £443m for 2022.

This impressive performance marks a 27 percentage point improvement on the previous year. This comes after operating expenses fell by almost 57% to £103.1m, driving a 25.2 percentage point reduction in the expense ratio to 35.3% – the second lowest across all lines of business, behind motor insurance.

Credit and surety was the second most profitable line of 2022 with a COR of 81.0%, although this was 6.4 percentage points worse than the previous year after net claims incurred rose by some 75.0%.

The impact of this was muted, however, adding just 2.4 percentage points to the loss ratio after net earned premiums rose by 63.8%, with the market no doubt benefiting from an increase in demand as a result of the tough economic conditions facing many of its insureds.

And with economic headwinds continuing to affect not just the UK’s economy, but also those across the world, pressures will continue to mount across all lines of business.

Cost inflation is expected to remain a factor affecting profitability and while premium increases will offset some of this negative impact, the outlook on future profitability improvements remains muted.