Moody’s downgrades outlook on the UK P&C insurance sector to negative

Moody’s has downgraded its outlook on the UK property and casualty (P&C) insurance sector from stable to negative, reflecting the adverse impact of high inflation on underwriting profitability.

The rating agency anticipates that P&C price increases and rising investment yields will be insufficient to restore earnings over the next 12-18 months.

It maintained its stable outlook on the UK life sector, which it says continues to show robust capital and healthy earnings, which it considers relatively resilient to slowing economic growth.

High inflation is pushing up P&C claims costs, exacerbating a steady increase in motor claims as vehicle usage normalises following a pandemic-induced decline.

Retail P&C insurers will struggle to push through offsetting price increases, held back by stiff competition and recent regulatory pricing reforms, while, in the commercial market, prices continue to rise, but at a slower pace.

Analysts also warned that inflation over a prolonged period of time could be a key threat as it increases reserving and pricing risk, particularly in long tail commercial P&C lines.

Moody’s see prolonged high inflation as the key risk to P&C insurers’ earnings as it would likely also push up wages, medical costs and longterm care expenses.

This would increase long-tail casualty claims, such as those related to severe motor bodily injury or professional liability. These can be costly and can take a long time to settle because of lengthy court proceedings.

As a result, insurers would also be forced to increase reserves set aside for unsettled past claims. This would undermine the profitability of UK P&C insurers, whose combined ratios have historically been supported by annual reserve releases.

Persistently high inflation could also lead to a more severe economic downturn, curbing demand for retail and commercial P&C insurance, and holding back insurers’ ability to increase prices.

Life insurers will continue to benefit from strong demand for bulk purchase annuities (BPAs) as more UK companies seek to offload their pension liabilities.

Low unemployment and rising interest rates will similarly support UK life insurers’ earnings despite slowing economic growth, while the UK’s ageing population and widening savings gap create strong long-term demand for life insurance and savings products.

by Yana Keller