EY General Insurance Industry Outlook 2018

14 December 2017

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Tony Sault, UK General Insurance Leader for EY, comments: “Last year was undoubtedly tough for the insurance market. This year, despite economic, regulatory and political challenges, there’s been an improved performance overall and we would expect this trend to continue into 2018. Although motor insurers will clearly be the greatest beneficiaries with the proposed revisions to the Ogden Rate announced in September.

“That’s not to say that there won’t be difficulties to contend with. With inflation of 3% - high compared to recent years - and likely to continue, consumer spending is likely to weaken which is expected to reduce demand for big tickets items such as cars. In fact, we are already seeing signs of a slowdown with The Society of Motor Manufacturers and Traders reporting a sharp 11.2% year-on-year drop in new registrations in November. We believe this will lead to a 5% reduction overall in 2017 from the record 2.69m sales last year. Housing transactions are also predicted to rise by just 4% next year, which is less than half the average rate seen in the last four years¹. Repeated recent increases in Insurance Premium Tax, now at 12%, are providing an additional challenge to the industry by reducing affordability and demand for insurance.”

The motor insurance industry will enjoy a rebound…

“The prospects for the motor industry improved dramatically after the publication in September of the proposed revised Ogden discount rate for personal injury claims. While the Justice Committee’s recommendations for the Government a couple of weeks ago on the draft Ogden rate legislation tempered things a little, we still expect the industry to be firmly back in the black next year. The Justice Committee’s report cautioned against an Ogden rate as high as +1%, as suggested by the Ministry of Justice in September, which it warned would put vulnerable claimants at risk of under-compensation. It also suggested a number of further hurdles should be cleared before the Bill is laid before Parliament, including further studies into how claimants invest money in practice and whether fair compensation is being achieved by current legislation. We believe the most likely outcome is now for the review to result in approximately £1.5bn reclaimed from last year’s £3.5bn losses, and a likely fall of up to 3% on average premiums, saving up to £14 annually for the average motorist.

“In addition to the Ogden changes, 2018 could also see the passage of the Civil Liability Bill. This would reduce the costs associated with bodily injury, potentially reducing premiums by an additional 8-10%, totalling a £59 per year saving once both reforms are fully implemented. Given these important changes in legislation, we now expect the motor insurance sector to be facing a far rosier 2018 compared to 2017 and predict a Net Combined Ratio (NCR) of 98.5%.”

…while home insurance will continue to feel the pressure in 2018

“As we predicted last year, the home insurance market experienced an extremely challenging 2017 as falling rates and rising costs continued to bite. Unfortunately we foresee little on the horizon that will alleviate these pressures. We think 2018 will be equally demanding, and that this is likely to be the case even if the UK doesn’t experience extreme weather conditions.

“Fundamentally, this is an industry in transition where the challenges may last for several years. While there is evidence of the green shoots of new business, traditional players are being challenged by new technology and are having to invest in digital capability in order to keep up. These changes have combined to push down premiums while at the same time rising claims and expensive inflation have created a double whammy. Taken together these issues have had a negative impact on profits with more deterioration expected to come. Home insurers are expected to achieve a barely profitable 99% NCR in 2017, assuming the year ends with no major weather events, with a further deterioration forecast for 2018 of 101.7% NCR.”

Speciality sector hit with costliest Atlantic Hurricane season on record

Andy Worth, Speciality Insurance Lead at EY, comments: “The first half of 2017 was fairly benign in terms of major weather or other large scale catastrophic events but, despite this, soft market pressure on results could be seen for H1, as well as lower reserve releases. NCR improved only slightly from 97.9% in 2016 to 96.9% (H1 2017). This was of course followed by the costliest Atlantic Hurricane season on record in H2 meaning it is likely to be a significant year of losses. Unlike 2005, where the considerable losses of Hurricane Katrina were, to some extent, offset by investment income, there will be no such cushioning lever in 2017 given the sustained low investment returns since the financial crisis. The impact of Hurricanes Irma, Harvey and Maria, as well as the California wildfires, will lead to some targeted rate hardening in 2018, especially in North American Property.

“The Reinsurance Treaty (reinsurance cover being purchased by primary insurers) renewal negotiations are likely to be robust - with brokers trying to negotiate 2-3 year deals at current rates, knowing they are attractive for their clients. Reinsurers are also likely to resist heavily by trying to push up rates. One new feature of the 2018 market will be the impact of the UK Insurance-Linked Securities (ILS) legislation. We are already seeing players create ILS platforms in London to take advantage of this opportunity.

“2018 will also be the year when we see many carriers execute their Brexit Programmes to support readiness for March 2019.”