U.K. non-life insurance stable

Standard & Poor’s Ratings Services is maintaining its stable outlook on the U.K. non-life insurance sector.
The stable rating as noted in S&P’s recent report titled “Insurance Industry Risk Analysis: United Kingdom Non-Life,” verifies expectations that most nteractive insurer financial strength ratings on domestic insurers (excluding reinsurers and London Market insurers) will remain unchanged.
However, S&P’s notes that the ratings and outlooks on most U.K. non-life insurers are also affected by their status within their group and/or by their foreign operations.
“A disciplined approach to underwriting, investments, and capital management, combined with good, steady economic conditions, means that we expect another profitable year in 2006, despite increasing price competition, and a more muted pricing cycle than in the past,” Standard & Poor’s credit analyst Nigel Bond says.
The economic risk to the credit quality of insurers is considered low, and the risk to the industry is also considered moderately low and improving.
The U.K. non-life insurance sector has high credit quality as evidenced the majority of S&P’s interactive ratings being ‘A-‘ or higher with stable outlooks.
The domestic market is showing premium growth that is closely linked to GDP, and as a result has benefited from 14 years of uninterrupted economic growth.
S&P’s says another positive factor for the sector is the U.K. regulator’s pre-emptive application of Solvency II-style regulations, which has helped lead to an increased use of enterprise risk management (ERM). S&P’s says it expects this will offer overall industry benefits of more rational pricing and capital allocation and therefore less volatile cycles.
“The regulation of U.K. non-life insurers is one of the most rigorous and advanced in the world, which in turn should result in one of the most robust non-life industries in the world,” Bond says.
S&P’s however notes negative credit factors due to the increasingly competitive pricing environment, which is putting pressure on underwriting margins. Shifts in distribution including broker consolidation and a move away from intermediaries to direct selling in personal lines, poses challenges to many insurers.
U.K. non-life insurers, S&P’s says, also continues to face low investment returns in their main asset classes of cash and bond investments.
“Nevertheless, balance sheets have improved considerably over the past three years, which is positive for the long-term credit quality of the sector,” Bond says.