Rate increases in UK non-life fail to stop profitability decline
Despite premium rate increases in some non-life lines of business in the UK during 2015 and the first half of 2016, the benefit was largely offset by a combination of higher claims, an increase in the level of insurance premium tax (IPT) and levies for Flood Re, according to AM Best.
The earnings of UK non-life insurers were under pressure in 2015 in a difficult operating environment. Overall, there was a marked fall in pre-tax profits, principally due to substantially lower realised and unrealised investment gains. Technical results were hit by weather-related losses, but remained profitable in aggregate, once again helped by favourable prior-year development.
In 2016, underwriting conditions are still difficult, AM Best noted. In personal lines, premium rate increases have been achieved in the first half of the year, most notably for motor business.
But the positive impact on results of higher prices has been partly offset by higher IPT, which has risen from 6 percent to 10 percent over the past twelve months, and strong competition is likely to constrain further upward rate movement. Across the market, the claims environment remains challenging as fraud and a growing compensation culture continue to put upward pressure on costs, in spite of recent government reforms and industry action.
Property and motor are the largest segments in the UK non-life market, each representing over 30 percent of non-life premium income. Liability follows, representing more than 10 percent of premium.
In 2015 the combined ratio in UK liability improved to 87 percent from 103 percent in 2014. In property, the combined ratio deteriorated to 100 percent from 93 percent over the period. Motor remained unchanged at 102 percent between 2014 and 2015.
Following the UK’s vote to leave the EU in June 2016, domestic insurers face the prospect of lower economic growth due to increased uncertainty, which could have a negative impact on premium volumes, AM Best noted. Companies writing business outside the UK may also have to contend with the loss of the passporting rights that currently allow them to write business in the European Economic area from UK-based subsidiaries.
Competition in the UK non-life market is set to remain price driven, according to AM Best. In personal lines, barriers to entry are low due to a bias towards telephone and internet sales and the popularity of price-comparison websites.
As e-trading becomes more widespread for small commercial risks, price-based competition in this market is increasing. Nevertheless, the UK non-life insurance market is still profitable. Positive underwriting earnings have been reported in each of the last five years, albeit with the help of reserve releases.
