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Fitch Revises UK Non-life Company Market Insurance Sector Outlook to Negative
March 9, 2017 / 4:45 PM / 9 months ago

Fitch Revises UK Non-life Company Market Insurance Sector Outlook to Negative

(The following statement was released by the rating agency) LONDON, March 09 (Fitch) Fitch Ratings has revised its sector outlook for the UK non-life company market insurance to negative from stable. Competition in the sector is already intense and Fitch expects that following the change in the Ogden discount rate insurers margins will come under further significant pressure in 2017. Despite these negative fundamentals, the rating outlook for Fitch's universe of rated insurers within the UK non-life sector remains Stable. This reflects strong capital adequacy, product diversification, conservative reserving policies and solid earnings of rated issuers. Given the strong credit fundamentals of Fitch's rated universe, we do not expect the Ogden discount rate change to result in negative rating actions for individual issuers. The Ministry of Justice announced on 27 February that the Ogden discount rate used to calculate the compensation in large motor and liability bodily injury claims would be cut to -0.75% from 2.5%, effective from 20 March, to reflect the lower real risk-free returns available on the UK index-linked government securities. Following the cut to the Ogden discount rate, insurers have suffered a one-off hit to earnings as they have been required to increase reserve estimates to account for the significantly higher costs of large bodily injury claims. For example, Direct Line reported a 38% and Admiral reported a 27% reduction in profit before tax for 2016 as a result of the Ogden discount rate cut. Fitch believes that many insurers will have used up a significant proportion of their reserve buffers to absorb the impact of the lower Ogden discount rate. Given the sector's historical reliance on reserve releases to support technical results, this will lead to a further drag on profitability as reserve releases are likely to be lower going forward. Fitch expects motor insurance premiums to rise significantly to reflect the substantially higher costs of bodily injury claims settlements. We believe that due to intense competition in the sector, it could be difficult for insurers to pass on in full the increased costs to policyholders. Furthermore, we expect increasing premium rates to lead to greater use of price comparison websites as more consumers shop around for cheaper coverage. In 2016, almost 70% of new business motor insurance sales were made through aggregators and we believe this is set to increase further, adding more pressure on already very thin profit margins. Fitch expects higher lump sum claims settlements to also drive substantial price increases for reinsurance cover. This could put a significant strain on companies that rely heavily on reinsurance as part of their business model. Smaller companies that would opt for lower retention limits are likely to be most affected as reinsurance pricing for those layers will increase significantly. Fitch believes that this could lead to consolidation in the sector as smaller players struggle with the increased cost of reinsurance, depleted reserves and pressured profitability as a result of intense competition. Whiplash reform proposals that aim to reduce the costs of exaggerated and fraudulent whiplash claims are currently being debated by Parliament as part of the Courts and Prisons Bill and are not expected to be implemented until October 2018. Fitch believes that potential savings from the whiplash reforms will be offset by the increased costs of claims as a result of the Ogden discount rate cut. A further increase in the insurance premium tax (IPT) to 12% from 10% is due to come into force on 1 June 2017, which adds further pressure to insurers' profitability as it will be hard for the industry to keep passing on higher costs to policyholders. The household insurance segment is also facing increasing pressure from the increased use of aggregators and most insurers were unable to pass on the cost of recent increases on IPT as well as Flood Re levies in 2016, leading to lower margins on household insurance. Contact: Ekaterina Ishchenko Associate Director +44 20 3530 1532 Fitch Ratings Limited 30 North Colonnade London E14 5GN Graham Coutts Director +44 20 3530 1654 Media Relations: Athos Larkou, London, Tel: +44 203 530 1549, Email: Additional information is available on ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. 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As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. 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