Underwriting Improvement Continued for UK Nonlife Insurers in 2003

Initial review of the aggregate statistics of the U.K. nonlife primary market suggests that, as expected, 2003 saw a modest continuation of the improvement in underwriting results seen since 2000, according to a report issued by A.M. Best. The market’s net combined ratio is estimated to be 94 for the calendar year 2003, compared with 98 for 2002, based on company regulatory returns incorporated in Best’s Statement File U.K.

However, analysis of the accident-year gross results of the major classes suggests that the improvement in results has probably peaked. In particular, on a gross basis, company regulatory returns show that property is the only major class producing an underwriting profit for the market overall. In addition, Best believes there are some strong indications that results have peaked.

According to the report, this suggests that, unless companies are far more effective than previously in managing business volume through the softening market, aggregate “through-the-cycle” underwriting profitability will remain elusive. If so, some insurers will find that maintaining the balance between shareholder returns and risk-adjusted capital levels will be challenging. This, in turn, would put pressure on future levels of financial strength, particularly through 2005 and 2006.

For property, Best’s current estimate of the 2003 gross loss ratio (GLR) for the whole market is a very strong 55, continuing the long-run trend that sees property as the only stand-out class for U.K. underwriters.

Motor results show a minor weakening, with Best’s GLR estimate increasing to 75 from 73. While some market participants continue to point to a strong pricing environment in motor, overall prices are not keeping pace with loss-cost inflation. Also, price-based competition is re-emerging.

Liability lines overall improved very substantially, with an estimated GLR of 69, 16 points better than in 2002. As for motor, however, the absolute level of losses, while much improved, suggests little more than underwriting breakeven.

Some commentators have suggested that insurers are using the much-improved pricing environment to over-reserve in liability. But Best believes the booked results are about what would be expected in terms of improvement on 2002, after considering rate increases and loss-cost inflation.

The accident-year performance of the U.K. property market improved to a GLR of 55 in 2003 from an already very good 62 in 2002. In particular, 2003 benefited from the global hard market in property prices. But rates began to soften during 2003, and this has continued into 2004. “SME,” or small and medium-size enterprise business has become a focal point of competition for the market, and it seems inevitable that this will continue the pressure on rates.

In motor pricing, it seems likely that rates peaked between mid-2002 and early 2003. But loss ratios in excess of 70 at the peak of the market are not consistent with earning an aggregate underwriting profit over the cycle, and the potential for the U.K. motor market to return to a substantial loss-making position is very real.

In liability, the loss position stabilized in 2003, with the substantial reserve increases made in 2002 for the 1998 to 2001 accident years for the most part still being largely sufficient. This has meant that the much-improved result for the 2003 accident year itself also is reflected in the calendar-year results for 2003 (i.e., prior-year losses have only detracted a little from the 2003 result). However, while 2004 will in turn benefit from some of the lag in recognising 2003 rate increases, Best does not believe the market has much further improvement left.

To download a PDF copy of the full study visit www.bestweek.com.