Cost cutting will have an increasingly big role to play as the UK general insurance sector attempts to maintain its profitability over the next 12 months, Moodys said today.
The ratings agency maintained its stable outlook for the industry, but said cost reductions and increases in premiums would together help to offset the negative impact the challenging economic situation is having on insurers.
Expectations that UK economic growth will be sluggish for the next few years means less demand for general insurance products, while persistently low interest rates limit insurers' earnings and the eurozone turmoil is further curtailing demand.
This combination of weak demand and low investment yields has forced insurers to increase their focus on the profitability of their underwriting, Moody's explained.
However, this profitability is being challenged by 'all-time-high' levels of competition, elevated levels of claims and the depletion of insurers' reserves.
This is expected to continue to put pressure on insurers to increase the prices they charge across most lines of business, Moody's said. Premium rates increased from 2009 to mid-2012, with motor insurance seeing particularly marked increases.
But, it noted that while these rate increases were sufficient to cover the increase in claims, they could not make up for the fall in investment income.
This means insurers are likely to increase their focus on maximising the efficiency of their operations. 'Underwriting results are increasingly dependent on the expense ratio, particularly as the economic environment limits top line growth and market conditions challenge loss rations,' Moody's said.
'We anticipate that insurers will continue to focus on expense reductions by reconfiguring their operations to function more efficiently,' it explained.
In particular, Moody's highlighted staff and marketing cost reductions, restructuring of businesses and changes in portfolios as way firms were cutting costs. Insurers are also investing more in making their business more effective, such as using telematics technology in motor insurance and flood-risk mapping in home business, it said.
Moody's added that various legal and regulatory changes would be positive for the industry, but did not change its stable outlook. In particular, it said the new rules governing Europe's insurance industry, Solvency II, are 'superior' to the current regulatory regime, but their delayed implementation is creating difficulties for the industry's major players.
The imminent expiry of the agreement guaranteeing affordable home insurance to properties in high flood-risk areas, the Statement of Principles, could increase the profits of insurers if they are able to either refuse to renew high-risk policies or charge higher premiums, Moody's said.
However, it added that this was not necessarily positive, because leaving 200,000 homes at high risk of flooding with either higher premiums or no cover at all could potentially damage the industry's reputation and could even lead to insurers being forced to provide cover in flood-exposed areas.