The economic environment is unfavourable for general insurers and expectations that the UK's economic growth will remain sluggish over the next few years translate into less demand for general insurance products. Additionally, persistently low interest rates continue to curtail earnings, while exposure to the euro area market turmoil further increases risks of softening demand for insurance products. "In the face of weak demand and low investment yields, insurers have increased their focus on underwriting profitability", explains David Masters, a Moody's Vice President for European Insurance and co-author of the report.
"All-time-high levels of competition, rising claims inflation and depleting reserve buffers however challenge underwriting profitability, which should lead to upward pressure on premiums across most lines of business", adds Helena Pavicic, a Moody's Associate Analyst and co-author of the report. Moody's believe that rate increases, together with material expense reductions can stabilise, or even modestly improve, underwriting profitability.
Civil, legal and regulatory reforms may be positive, but do not change the overall outlook. Market reforms have the ability to reduce claims inflation, particularly for motor insurers, but elevate short-term pricing risk. Moody's considers the underlying principles and economic capital based measures of Solvency II to be superior to the current regulatory regime. However, the delay in implementation is counter-productive for the largest players as it makes strategic and financial planning more difficult.
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