The fundamental indicators of the UK non-life insurance sector remain weak with earnings expected to face further pressure over the next 12-24 months and reserve surpluses continuing to decrease, Fitch Ratings said today.
In its outlook for the sector next year, the ratings agency reaffirmed its 'stable' rating expectations, but warned that a 'marked deterioration' in global financial markets could have a negative effect on insurers' ratings.
It also discounted any positive change in the sector outlook as a result of the weak outlook for fundamental indicators, including investment returns, current-year technical results and levels of reserve surplus. 'Fitch anticipates continued pressure on earnings, driven primarily by muted investment income but also reduced contribution from prior-year reserves,' it said.
'Underwriting conditions are expected to remain challenging, with only a marginal improvement in technical margins in 2012 and 2013,' it added, noting the sector's 'historical reliance' on investment income.
In terms of the 'company market' - insurers mainly selling retail products to individuals and small and medium-sized enterprises - Fitch said pricing of insurance products remained inadequate.
'Intense' competition for business and companies looking harder for better prices on insurance deals have prevented insurers from making a profit on commercial lines such as motor and property insurers.
Fitch said that, while it expected underwriting profitability to improve thanks to modest increases in premium rates, insurers in this part of the sector would be best served by focusing on 'more selective' underwriting rather than pricing.
Despite the earnings challenges facing the sector, Fitch said its strong levels of capital remained the key factor underpinning the majority of its current ratings for UK non-life insurers.
But it warned that insurers who faced 'significant exposure' to catastrophic events last year could see their ratings affected by further major loss events in 2012 or 2013. A closure of capital markets caused by any further downturn in global financial markets could also impair the sector's ability to repair their balance sheet strength after any such events, it noted.