Fitch warns of ‘dire’ profitability for insurers in ‘bleak’ picture

The specialists first warned of a deteriorating outlook for the UK non-life company market sector in November.

Faccio listed pressure on earnings from the Financial Conduct Authority’s dual pricing ban and continuing high claims inflation among five factors for the view.

The others were claims frequency normalising after the pandemic, the time it takes for pricing corrections to filter through to profits and strong competition in the market.

Inflation

Similar trends can also be seen in Europe, he acknowledged but stressed the UK was “unique” in terms of regulation and the degree of competition.

In particular though inflation is driving costs, Faccio underlined citing the firm’s own figures and data from the Association of British Insurers (see graph below).

“The picture is actually bleak so can premiums keep pace?” he questioned suggesting the best answer was “sort of”.

“There are signs of average premiums going up in response to all the challenges on claims cost,” Faccio set out.

“This is going to continue and the pace of this increase will accelerate but businesses have to confront competition which … in the UK is pretty strong. That of course represents a major headwind,” he observed.

Difficult quarters

Research from aggregator Confused and broker WTW last month detailed motor rates shot up 19% in 2022.

For motor Faccio maintained there was still “definitely catch up to do on pricing” adding: “Certainly there are a few difficult quarters ahead for the sector.”

In November EY stated that UK motor and home insurers would make the biggest annual loss in 2022 for over a decade and forecast further losses for 2023.

Net combined ratios would be 115% in motor and 116% in home staying high this year at 114% and 109% respectively, it predicted.

Faccio concurred that ratios would be “well above 100%” in both years.

“High investment returns will help, probably, but they could also present a sort of disincentive for a very, very strong underwriting discipline,” he observed.

Winners and losers

Another challenge, according to the expert, is the cost of reinsurance has increased substantially and he also flagged the cost of living crisis.

“Companies are squeezed between this difficulty with pricing and people having less money,” he noted. “The economy is not booming.”

In a rare glimmer of positivity for the market he set out that Solvency II ratios for main players remained strong last year and good levels of capitalisation should continue into 2023.

“Essentially we see a pretty good picture with resilience and relatively healthy numbers,” he said.

Concluding: “We think, however, that like in any difficult situation there will be winners and losers. Companies that [have] discipline, strong capital and good reserves will almost certainly fare better.”

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