S&P Report on U.K. Insurance Market – Stable Despite Cycle, Economic Risks

Standard & Poor’s Ratings Services’ latest review of the U.K. insurance market – “Insurance Industry Risk Analysis: U.K. Economic Risk Increases But Unlikely To Put Pressure On Non-Life Ratings” – concludes that, “despite the strength of results and ratings, the increased risk of recession is a concern for the sector.”

S&P noted: “The support insurance companies have enjoyed from the steady growth of the economy in recent years is set to come under increased pressure as a result of the credit crunch. This comes at a time when the sector also faces softening market conditions and reduced underwriting margins.”

S&P credit analyst Nigel Bond explained that, from S&P’s analysis, “the U.K. economy is one of the most exposed in Europe to recession risks and this, combined with predictions from the Bank of England that growth is likely to shudder to a halt in the next few months, is an issue for the long term prospects of insurers.” [IJ note: As an example, the latest figures show a 2.5 percent decline in UK home prices in March – the biggest since 1992].

However, Bond also indicated that the situation is “counter-balanced to a certain extent by the improvements the non-life insurance market has made to risk/capital management compared to previous downturns. Combined with an increased focus on profitable underwriting, this should mean insurers are less vulnerable to an economic dip.”

The U.K. non-life insurance industry is the third largest in the world in terms of premiums with gross written premiums of £66.5 billion ($131.6 billion) and net written premiums of £51.1 billion ($101.17 billion) in 2006. “However,” S&P noted, “it is also a highly competitive market, particularly with regard to pricing. Bond indicated that, “despite the continuing intensity of competition,” S&P believes “there will be more discipline in the market, in part because of a greater focus on risk-adjusted returns and maintaining underwriting profitability.”

This discipline is partly due to the strength of the U.K.’s regulatory regime which is a positive factor for the sector, despite criticism of the Financial Services Authority (FSA) in the aftermath of the Northern Rock collapse. “By pre-empting the introduction of Solvency II with the introduction of its own risk-based capital regime, the FSA has caused U.K. insurers to focus on enterprise risk management, which we see as a real benefit in terms of rational pricing and capital allocation,” Bond explained.

However, S&P’s report says the work is incomplete. Under Solvency II, as currently proposed, 20 percent of U.K. non-life insurers would have “inadequate capital (see ‘Standard & Poor’s Shares Its Experience Of Rating Insurance Groups With The Public Hearing On Solvency II QIS 4’ published on April 7, 2008).”

S&P said its ratings outlook on the majority of UK insurers that it rates remains stable, “and performance in 2008 is likely to be better than in 2007, barring the effects of any catastrophic losses. The key challenge will be to manage costs when prices are inadequate.”
“We will be looking to see how capital evolves in an insurance cycle downturn,” Bond stated. “We are anticipating a more disciplined and rational use of capital, but this has yet to be tested in the soft part of the underwriting cycle.”

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Source: Standard & Poor’s