Rating agency AM Best has maintained its negative view of UK non-life insurance, blaming a mix of macro factors, but also the continued hard market for reinsurance pricing


Inflation, competitiveness and economic pressures lead the roster of reasons why AM Best has opted to keep its negative outlook on the UK’s non-life insurance sector.

The credit rating agency said underwriting performance challenges were driven by inflationary pressures.

Insurers’ rate-setting power is constrained by pressure on household incomes and the highly competitive personal lines market, AM Best emphasised.

Furthermore, economic pressures are affecting demand and increasing the likelihood of fraudulent claims weighing on insurers’ results.

There is also the higher cost and more limited availability of reinsurance protection to consider, AM Best emphasised, and increased volatility for property lines from weather-related exposures.

“In addition to a rise in claims costs, the higher cost of reinsurance protection is likely to squeeze underwriting margins.

At January reinsurance renewals, AM Best observed a continuation of the significant hardening of reinsurance rates seen in 2022.

“Given the highly competitive market environment, as well as the inflationary pressures that are affecting insurance-buying decisions, it is unlikely that UK insurers will be able to pass on the elevated cost of reinsurance to their customers, particularly to retail clients,” said the rating agency.

“Companies may be left with two choices: to either reduce the level of reinsurance cover purchased and retain more risk; or, to absorb the increased cost of reinsurance, which would further erode the already pressured underwriting margins reported by the sector,” AM Best added.

Moderating factors

Positive pricing momentum in commercial lines provides a boost, the rating agency highlighted.

“Although commercial lines insurers are expected also to be affected by prolonged economic pressures, rates for commercial business continue to show good upward momentum, indicating that the market has been more successful in passing on increased costs to policyholders,” the report said.

“In comparison to the retail market, the UK commercial segment suffers to a lesser extent from fierce price competition, with the quality of service and existing relationships playing a greater role in customers’ decision-making process.”

Rising interest rates, combined with the short average duration of the market’s investments, present a nuanced picture leading to some benefits.

This presents insurers with an opportunity to reinvest at more attractive yields as their generally short-term portfolios can reposition, AM Best suggested.

There will also be some positive impact on claims from UK legislative reforms, likely to increase over time, AM Best added.

On 1 January 2022, new pricing rules from the Financial Conduct Authority for retail motor and home insurance came into effect. The rules dictate insurers charge a new customer the same price as an equivalent renewing customer for the same policy.

“AM Best expects the impact of the rules on earnings to be limited if companies can increase new business sufficiently to absorb lost rate increases on renewals.

“However, the frequency of customers shifting between insurers is expected to decrease as prices on new business and renewals converge, which may reduce priced-based competition,” said the report.

“The impact of the pricing reforms is likely to take some time to materialise and is difficult to isolate from other drivers of price movements,” AM Best added.