Fitch sees negative outlook for non-life insurance sector

US statistical ratings agency Fitch Ratings has classified the UK non-life sector outlook as negative, blaming increased claims inflation for motor and home insurance as well as a weak pricing environment.

Speaking at Fitch Ratings’ Insurance Roadshow 2020 event yesterday, Ekaterina Ishchenko, director at Fitch Ratings, explained that in the UK non-life market, underwriting losses should be expected in both the home and motor insurance sectors.

In particular, Ishchenko noted that uncertainty surrounding the FCA’s dual pricing consultation has left the market scratching its head over potential remedies and impacts.

Ishchenko further observed that household insurance would most likely see more severe impacts from the dual pricing debate than motor cover, as the aggregator distribution channel partly protects motor insurers from adverse effects.

“The household sector remains very competitive. What we’ve seen in recent years is the number of motor insurers in the market [are] attracted by stronger profit margins,” Ishchenko said.

“We also see that aggregators continuously increase their share of the distribution channel for household [insurance], so that makes [the] price more transparent and makes the competition even higher.”

Furthermore, Ishchenko noted that insurers are more vulnerable now to weather losses, while the motor sector in particular could see high claims inflation, as the pound has weakened in conjunction with higher labour costs and having to import spare parts.

Fitch Ratings’ data also suggested that premiums for motor insurance have actually been falling since 2018, partly due to the Ogden discount rate. In turn, personal injury claims are higher and some insurers are pushing for rate increases. Although prices are on the up, Ishchenko predicts lower claims inflation for 2020.

London market

In comparison, Fitch Ratings classified the London market outlook as stable, as pricing conditions improve alongside underwriting results. Despite this, Ishchenko pointed out that the London market can still expect high expense ratios and risks in casualty reserving.

Lloyd’s of London’s profitability review was positive, which also impacted the wider London market pricing. Ishchenko believes this, in turn, will support Brexit and underwriting. The review, in her opinion, focused on reducing attrition loss ratios and expenses.

She further mentioned the Future at Lloyd’s initiative, highlighting a scheme designed to remove unnecessary costs; this project will take around three years to implement.

Trends

Fitch Ratings’ event also gathered industry experts for a panel debate on the future of the non-life market.

For Paul Brand, co-founder and deputy chief executive at Convex, the growth of algorithm-based insurance will be increasingly important, alongside the marriage of great technology and brand messaging in order to attract customers.

Burkhard Keese, chief financial officer at Lloyd’s of London, on the other hand, pointed to blockchain for claims handling as a key future initiative.

A hot topic for all of the panelists was climate change because it has multi-dimensional risks; the group warned insurers to be wary of their exposure.

Despite this, Sheila Cameron, chief executive at the Lloyd’s Market Association (LMA), noted that insurers are now collaborating more on how to tackle climate change, debating the right products to offer in order to better respond to clients’ needs.

Brand, however, said that some insurers are nervous about insuring coal businesses, as they are seen as polluters.

He added that coal mining is not illegal so, the question is purely a moral one in terms of whether insurers extend cover to organisations within this sector or not.

Another area of concern is cyber insurance, said panellist David Flandro, managing director, analytics at Hyperion X. He said that this is a complex pricing area, and although firms are getting better at writing cyber insurance products, no-one is doing it “completely correctly” just yet.

Cameron additionally spoke on market reform at Lloyd’s; currently, its expense ratio sits around 40% to 42% - 12% of this is administration costs and the remainder is acquisition costs. One way of stripping back this expense could lie in automating delegated authorities, she said.

“If you look at what dials [the acquisition costs] up over time, it’s been a change in the mix of business and the reliance and the move more towards a delegated authority book, which has exceptionally high acquisition costs,” Cameron said.

“So, what are we going to do about that? What a lot of the work that the programme at Lloyd’s is doing will focus on the 12% [administrative costs] and then it becomes a lever for carriers at Lloyd’s and others to have conversations with [the] broking community around the acquisition costs.”