London market pricing to stay firm into 2023, says Fitch

Fitch Ratings expects positive pricing momentum to be maintained into 2023 for the London insurance market sector, despite economic uncertainty. As a result, Fitch’s sector outlook for the market is neutral, “as pricing keeps pace with loss cost increases and higher reinvestment yields help to offset the increasing pressure on margins from inflation”. “Our sector outlook on the London market is neutral for 2023 as we believe demand should not be significantly affected by the economic slowdown, with price increases and higher reinvestment yields offsetting rising claims inflation. Combined ratios are improving on strong pricing trends and actions taken to remediate underperforming classes of business since 2018,” said Fitch. It said it expects pricing conditions to remain favourable in 2023 and profitability will continue to be supported by improved market discipline. However, it added that several challenges remain, including increasing economic uncertainty, falling asset values and inflation. Premium rate rises have continued in 2022, with several insurers reporting double-digit rate increases in H1 2022. “We believe high claims inflation, significant natural catastrophe losses (in particular from hurricane Ian) and worsening experience on the cyber book have all contributed to the improved premium rates. These improvements come off the back of existing positive rate movement, following the significant pandemic losses in 2020,” said the ratings agency. Nevertheless, Fitch believes that many London market insurers retain reserves at significantly above best estimates. “These insurers are likely to need to use up some of these buffers in 2023 to offset the pressures from rising claims inflation,” it noted. Graham Coutts, senior director, Fitch, said: “We believe London market insurers will be able to offset the challenging economic outlook due to strong pricing improvements and increasing reinvestment yields.” Fitch said margin pressure in property (re)insurance lines may emerge soon if price increases do not keep up with repair and construction cost inflation. “Long-tail casualty lines may also suffer due to the compounding effect of any multi-year inflation, magnifying the effects of social inflation, which triggered significant casualty and liability reserve strengthening and price increases from 2018 to 2020… Given that pricing discipline is weaker in casualty lines, we see a risk the industry may act too late to counter mounting claims inflation,” it said. Fitch said it expects the contribution from investment income to insurers’ profits to grow significantly in 2023, and investment returns should help to offset at least some of the negativity from the deteriorating macroeconomic environment and rising claims inflation. It noted that the UK insurance market is characterised by high levels of regulatory scrutiny with the associated high regulatory costs. “The Treasury has proposed several reforms that will hold the regulator to greater accountability and impose greater transparency over regulatory processes. This could lead to reduced reporting requirements and lower barriers to entry for startups. It could also help the London market to remain competitive despite increasing competition from Bermuda and other regional hubs,” said Fitch.

London market pricing to stay firm into 2023, says Fitch

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