Reinsurance costs, lack of aggregate cover are risks to UK P&C sector: Moody’s

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Moody’s Investors Service said today that it is continuing to hold a negative outlook on the UK property and casualty (P&C) insurance sector, citing higher reinsurance costs and less availability of aggregate coverage as key factors.

The commentary from the rating agency further drives home the influence of the harder reinsurance market and reinsurers aversion to assuming more volatility from cedents, on the primary carrier community, which is already battling macro economic effects.

Echoing some of the challenges being seen in the United States, Moody’s explained that the UK’s P&C insurers are also struggling in the face of inflation, which is driving up claims costs for them.

Moody’s explained, “Our outlook for the UK property and casualty (P&C) insurance sector remains negative, reflecting higher reinsurance costs and pressure on personal lines margins as price growth lags inflationary cost increases.”

Adding that, “Commercial insurance pricing is healthier, but price growth has peaked, and claims inflation may trigger additional reserve contributions, eroding earnings.”

In addition, Moody’s says that inflation and the state of the UK economy will also hold back insurance sales.

Earning are expected to remain under pressure, as despite insurance pricing rising, the carriers still have business written from prior years to deal with, when pricing is now seen to have been inadequate compared to the inflation experienced through policy terms.

The UK home insurance sector may be profitable, as price increases more closely track inflation there, but rising claims costs are expected to negatively affect results, Moody’s said.

“Excluding severe weather events, we expect the market to be profitable, but less so than in 2022. New entrants and companies with less mature back books that expanded rapidly after a 2022 ban on the previously widespread practice of charging renewing customers more than first timers, will need to defend their renewal margins. This will reduce competitive pressure on pricing. However, severe weather events will likely be more expensive than in the past because of claims inflation and reduced availability of reinsurance,” Moody’s said.

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Higher reinsurance costs will weigh on UK P&C insurers, Moodys’ said, as well as the generally higher levels of risk now retained rather than ceded to reinsurers.

“Catastrophe losses are typically moderate in the UK. However, concerns in the global reinsurance market around climate change and higher loss frequency have reduced reinsurance capacity, especially for relatively frequent but less severe risks such as storms and floods. This will keep costs high and terms and conditions tight,” Moody’s said.

The rating agency also noted that volatility protection has all but evaporated, as reinsurance markets stopped pricing aggregate covers, or priced them generally out of reach of insurers.

“This kind of cover is now significantly more expensive at the same terms and conditions, or unavailable,” Moody’s explained.

Importantly, the rating agency notes that if inflation persists, then insurance price adequacy will again come into question.

This could also raise further questions about price adequacy in reinsurance.

If a less catastrophe prone country like the UK sees the reinsurance market struggling to cover its costs, what hope has it got in the US and other regions, all of which suggests the hard reinsurance market may persist longer than anticipated and we really may have seen a new baseline set in the pricing cycle this time around.

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