UK insurers face weather perils, claims inflation pressures

AM Best is maintaining its negative outlook on the UK non-life sector due to a number of challenges facing the market, including exposure to weather-related events and the prospect of higher claims cost as inflation pressures mount.

The ratings agency also raised concerns that motor insurers, which generate one-third of UK general insurance premiums, may struggle to raise rates to offset the impact of claims inflation because of intense competition.

“Inflation is likely to drive an increase in claims costs, due to the rise in the replacement cost of underlying parts and increased labour costs,” AM Best says.

“The ability of insurers to weather these increased costs will depend on their ability to achieve commensurate rate rises, which may be supressed by high levels of competition in the personal motor and household sectors.”

AM Best says insurance demand may also be affected as UK consumers, hit by rising living costs and higher mortgage repayments, cut back on non-daily household items.

On motor lines, AM Best says it expects claims inflation to continue to exceed rate rises for the rest of this year.

“Lengthier and costlier repairs [are] due to the increasing levels of technology used in vehicles,” the agency says.

“Covid-19, and more recently the conflict in Ukraine, have compounded the situation, with supply chain disruption increasing the cost of parts and labour for repairs and inflating used car prices, leading to increased write-off costs.”

Property lines are also under pressure, particularly from increasingly severe and frequent floods and other weather perils, according to AM Best.

Since the start of this year a number of storms have affected parts of the country, putting property insurers in line for claims costs in the hundreds of millions.

“Exposure to weather-related events, especially flood risk, subjects property lines to volatility,” the rating agency says.

But AM Best says there are some positive trends for the non-life sector too, such as the continued rise in premium rates for commercial lines this year.

While the pace of increase will be smaller than last year, it will still benefit commercial lines insurers, the ratings agency says.