A.M. Best: Economic Climate May Trigger a Turn in U.K. Cycle

September 30, 2008

Underwriting margins in the United Kingdom remain under pressure in 2008, despite positive rate movement in some sectors, according to a report by A.M. Best, which also suggested that the economic downturn could ultimately lead to a turn in the insurance cycle as investment income of insurers declines.

The rating agency said claims inflation continues to exert a negative impact on loss ratios and at the same time, insurers have not been able to rely on investment earnings to offset weak technical performance, owing to the volatility in the global equity and debt markets. Earnings, however, may still improve compared with 2007, a particularly difficult year for U.K. insurers, the latest report said.

Accident year loss ratios for the main classes of business have deteriorated as a result of continued claims inflation and competitive pressure on premium rates. However, calendar year results have been supported by reserve releases and investment income, and as a consequence, many insurers have continued to report acceptable earnings.

The economic downturn is, however, expected to have a negative effect on investment income, which is likely to decline for many companies. Some U.K. insurers’ investment returns will also be affected by the collapse of Lehman Brothers and subprime asset write-downs, though the direct impact of these factors is not expected to be significant, A.M. Best added.

The economic downturn may also have an impact on claims experience over an extended period and ultimately on the scope companies have to make releases from reserves.

U.K. insurers’ capitalisation levels and earnings are expected to remain good in 2008; however, in the longer term, the deteriorating economic climate is likely to negatively impact earnings and could ultimately lead to a turn in the market cycle.

Source: A.M. Best

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