Rising premiums will have marginal ratings impact

Premium rates in the UK property and casualty (P&C) insurance sector is unlikely to significantly improve the current ratings for institutions in the sector, says Moody's Investors Service in a new Special Comment.

Moody's said it expects the pricing environment for the UK P&C sector to continue to improve over the next 12-18 months and will likely more than exceed claims inflation levels, helping restore much needed underwriting profitability. Moreover, claims inflation levels are likely, in the rating agency's view, to decline further as a result of lower wage and other operating costs inflation levels in the short term.

But over the longer term Moody's believes that quantitative easing, Sterling's recent decline and a future economic recovery are likely to cause an increase in future claims inflation levels once the economic recovery begins.

"Furthermore, the severe ongoing UK recession is reducing discretionary" spending, thus potentially reducing the overall demand for insurance products; for example, potential top-line reductions arising from the potential to switch from fully comprehensive motor insurance to third party, fire and theft cover only," said David Masters, Moody's lead analyst for the UK P&C sector.

In this context, Moody's notes that insurers that chase top-line growth

in a declining/stagnant market are likely to only succeed in doing so by competing on price, a situation that could derail the current pricing opportunities and become detrimental to all players in the market. "The credit rating implications for UK P&C insurers from premium rate increases are thus likely to be only marginally positive," added Masters.