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The UK non-life market has seen a few positives to aid in economic recovery from recessionary conditions in the coming months – despite the fact that the UK managed a small amount of economic growth in Q1 2023. This analysis comes from AM Best, which just released its latest UK Market Segment report.
"The constraint on insurers to increase premiums amid pressure on household
incomes and a highly competitive personal lines market".
The report said that insurers were already making strategic changes to combat these negative outlooks. “Insurers have started to realise higher investment yields, as their generally short duration bond portfolios roll over, although the yields in real terms remain suppressed,” it added.
The report mentioned several factors that were currently punishing the UK non-life market – such as underwriting performance challenges, which were driven by inflationary pressures and “the constraint on insurers to increase premiums amid pressure on household incomes and a highly competitive personal lines market”.
This difficultly came on top of exposure to weather-related events, which increasing volatility for property lines. “AM Best believes the higher cost and more limited availability of reinsurance protection is likely to squeeze underwriting margins,” the report continued.
One factor for this persistent volatility is ongoing inflationary circumstances across global markets. The Consumer Prices Index (CPI) rose by 10.4% in the 12 months to February 2023, up from 10.1% in January, according to the UK’s Office of National Statistics.
“On a monthly basis, CPI rose by 1.1% in February 2023, compared with a rise of 0.8% in February 2022,” the Office said. The UK’s current interest rate is 4.25%, which was raised again at the end of March in an attempt from the Bank of England (BoE) to try and cool inflation.
“Insurers will experience further market-to-market losses on their
fixed income portfolios.”
The effects of the economic volatility have already manifested in other ways – for example, the average UK house price dropped 3.1% from January to March 2023 for the seventh consecutive month. This could likely be affected by the current inflationary pressures.
AM Best warned in its report that if the Bank Rate keeps rising, “insurers will experience further market-to-market losses on their fixed income portfolios.”
However, it also added that the majority of the UK non-life insurance market employs asset-liability matching practices and has a short average duration of investment, which could ease pain due to cash on hand reserves. “[They] maintain robust levels of liquidity. Hence, it is expected that most of those mark-to-market losses will unwind over time and are unlikely to be realised.
The BoE’s Monetary Policy Committee (MPC) set this number to meet the 2% inflation target, which could help sustain growth and employment.
“Global growth is expected to be stronger than projected in the February Monetary Policy Report, and core consumer price inflation in advanced economies has remained elevated,” said the BoE’s press statement on the increase and contributing factors. “Wholesale gas futures and oil prices have fallen materially.”
“Bank wholesale funding costs have risen in the UK and other advanced economies,” it continued. “The MPC will continue to monitor any effects on the credit conditions faced, and hence the impact on the macroeconomic and inflation outlook.”
"The forecasts from the Office for Budget Responsibility (OBR) showed the
UK would avoid a technical recession."
Chancellor of the Exchequer Jeremy Hunt, who delivered a budget last month that tried to stimulate growth, said that the UK had narrowly avoided recessionary conditions so far in 2023 – adding that the economy was showing good signs of a full recovery from the pandemic.
The forecasts from the Office for Budget Responsibility (OBR) showed the UK would avoid a technical recession – two-quarters of negative growth – in 2023 despite previous predictions.
However, the economy was still set to contract overall this year by 0.2%, and the OBR has warned living standards are still expected to fall by the largest amount since records began.
Comparatively, the Eurozone saw an 0.1% GDP increase in 2023 Q1, and the US had 0.7% GDP growth in 2022 Q4 and 0.3% in 2023 Q1.
In his recent budget, Hunt announced a £9 billion policy centred around “full capital expensing” for the next three years, which could help some insurers, and will allow companies to write off all investment against their tax bills.
The hope from Hunt was to appease business with the investing programme, meaning that if companies invest in the UK, they will receive tax rebates. There is also still hope for the relaxation of Solvency II capital requirements.
However, outlooks aren’t completely negative. Fitch Ratings also released a report saying that, unlike non-life, UK Life Insurance fundamentals were showing resilience despite the volatile markets.
"The sector has limited direct exposure to the collapses and the
wipe-out of Credit Suisse AG’s additional Tier 1 notes."
“UK life insurers’ fundamentals remained strong in 2022, despite financial market volatility and elevated inflation,” it said. “Insurers’ new business volumes and underlying operating performance were resilient, while the rising interest rates benefitted companies’ Solvency II (S2) ratios.”
However, the report warned that recent US bank collapses and the UBS takeover of Credit Suisse could see further volatility spread. “The sector has limited direct exposure to the collapses and the wipe-out of Credit Suisse AG’s additional Tier 1 notes. It is exposed to the banking sector more broadly through holdings of investment-grade bank debt, derivative counterparty exposure and the provision of liquidity lines. However, these exposures are generally highly diversified.”
The report also noted that one potential scenario to monitor was that of a substantial rise in defaults and downgrades in insurers’ investment portfolios remains a key risk. “Insurers’ asset portfolios are well diversified and corporate defaults experience have remained favourable in 2022.”
