Best Analyzes UK P/C Market; Will They Manage the Cycle?

A.M. Best Co. has released a report on the U.K. non-life market, the third largest in the world. It is more or less dominated by five companies — Aviva, Royal Bank of Scotland (RBS), Royal & Sun Alliance, AXA and Zurich. Best concluded that, “in highly commoditized lines, such as personal motor and household insurance,” these larger companies “are able to leverage economies of scale to gain a competitive advantage. However, opportunities remain for smaller, niche insurers, which can compete on service and, to some extent, are insulated from price-led competition.”

The report also concludes that, “further rate reductions across most business lines” are likely during 2007, “although the pace of decline is expected to slow.” Best based that conclusion on its view that “underwriting performance will be less cyclical than in the past, principally due to insurers’ increasing focus on profitability rather than on volume-based performance indicators. However, commercial liability earnings are expected to remain volatile.”

The market benefits from the “strong regulatory environment under the supervision of the Financial Services Authority (FSA). Along with this, Best said it “believes U.K. insurers are implementing more stringent underwriting guidelines that should moderate rate decreases. In addition, better risk management capabilities and access to tools such as stochastic models are improving the analysis of historic claims data and aggregate exposures, facilitating more accurate pricing.” While the “dominance of the top 10 insurers and the vocal commitment of these market leaders to underwriting discipline may also encourage stability.”

However, Best observed, “U.K. insurers have a poor record of active cycle management, and the willingness of companies to sacrifice market share in pursuit of profitability has yet to be tested fully.”

2007 also looks set to be a year where “a combination of deteriorating premium rates, losses from Windstorm Kyrill and claims inflation is likely to place upward pressure on loss ratios,” said Best. “Insurers are expected to increase their focus on expense savings, although this will be difficult to achieve in a weak rating environment where companies need to compete on service as well as price.”

The UK non-life market has had some success in reducing losses, posting “sub-100 combined ratios” in recent years. This has been achieved through “better claims management and reserve releases,” said Best. But, the rating agency also noted that “substantial profits have encouraged insurers to reduce prices, which in turn has led to deterioration in the combined ratio. In 2006, a small underwriting profit is anticipated, as relatively benign claims experience partly offsets rate decreases. However, with further rate reductions anticipated in 2007, underwriting profitability is unlikely to be maintained.”

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