Moody’s, the global credit rating agency, has reaffirmed its negative outlook for the United Kingdom’s property and casualty (P&C) insurance sector, citing ongoing challenges stemming from escalating claims and reinsurance costs.
The negative outlook reflects the sector’s struggles with higher reinsurance expenses and mounting pressure on personal lines’ profit margins.
Moody’s analysis reveals that the growth of insurance prices in personal lines continues to lag behind the increasing costs driven by inflation.
While commercial insurance pricing remains in relatively better shape, Moody’s indicates that the growth trajectory has peaked.
Rising claims, particularly in long-tail business segments, where there’s a delay between the insured event and claim settlements, may compel insurers to bolster their reserves. This, in turn, could erode earnings in the commercial insurance sector.
The report highlights that insurers are increasingly retaining more risk due to the elevated costs of reinsurance. While this may protect insurers’ capital, it introduces greater volatility in earnings.
Higher reinsurance costs are a significant drag on underwriting results. P&C insurers are now faced with a difficult choice – either pay more for the same level of coverage or opt to retain more risk, both of which contribute to increased earnings volatility.
Concerns within the global reinsurance market related to climate change and higher loss frequency have led to a reduction in reinsurance capacity.
This reduction particularly impacts relatively frequent but less severe risks, such as storms and floods, causing costs to remain high and terms and conditions to become less favourable.
The report underscores the sharp increase in reinsurance costs during the annual contract renewals in January 2023. Previously, insurers had shielded their earnings using aggregate coverage with low attachment points, which provided cover for multiple smaller events.
However, this type of coverage has become significantly more expensive under the same terms and conditions, or in some cases, entirely unavailable.
Moody’s analysis reveals that solvency levels for personal lines P&C insurers have generally remained flat or have declined. Factors contributing to this decline include underwriting losses, widening credit spreads, and the volatility of equity markets.
While higher interest rates are expected to gradually improve investment returns, they may also lead to increased defaults in speculative-grade investments.
Moody’s suggests that the sector’s outlook could shift to stable if certain conditions are met. These include concrete evidence that price increases are sufficient to offset underwriting losses in personal lines and to continue combating claims inflation in commercial lines.
Additionally, having ample reserves to handle inflation-related strengthening in long-tail lines is seen as a key factor.
Lastly, stronger economic growth, stable equity markets, and narrower credit spreads, coupled with a decline in inflation towards central banks’ 2% target, could support capital generation and potentially improve the sector’s outlook.