In Standard & Poor's Ratings Services' view, the UK non-life insurance industry is facing a number of significant regulatory developments at a vulnerable time ("Legal And Regulatory Changes: A Help Or A Hindrance To The UK Non-Life Insurance Market?").
A new agreement is needed to determine the basis on which flood cover is provided beyond June 2013; legal changes in April 2013 will seek to counter rampant claims inflation in motor bodily injury lines; referral fees are to be outlawed; and the Competition Commission has set up an enquiry into the motor insurance sector. The changes are potentially positive for insurers, but significant uncertainties remain.
Meanwhile, the increasing use of comparison websites to purchase retail lines is squeezing profit margins, the market is increasingly commoditized, and investment returns are likely to remain low. Because the UK non-life market is developed and mature, we expect future growth to be relatively slow. Two trends have supported results in recent years: reserve releases and tariff increases. However, these trends appear to be coming to an end. On top of relatively unfavourable industry fundamentals, this could make 2012-2013 difficult for players in the non-life market.
Standard & Poor's Ratings Services has also published a report discussing its view of the ongoing regulatory changes in the UK life insurance market ("UK Life Insurers Face Hard Choices As Low Interest Rates Coincide With Widespread Regulatory Reform"). In their view, these require a strategic response from all players, even the market leaders. At the same time, continued macroeconomic uncertainty serves to constrain the margin for error.
In their view, the insurers in the UK life sector that they expect to maintain or enhance their credit strength after the regulatory changes will be those with a broad distribution and product base that is not reliant on commission. In addition, those insurers that have access to the market via a number of routes or whose customers have already made the cultural transition to paying for advice will likely gain most from the changes under the Retail Distribution Review(RDR). The insurers that can extract value from auto-enrolment will be those that are able to retain and select schemes without weakening their profitability and those that can exploit the opportunity to sell a broader suite of benefits. Overall, a dip in new life sales appears likely over 2013 and 2014 as the market readjusts.
Across the industry, capitalization remains robust and has benefitted from significant reductions in risk. Furthermore, S&P consider the balance sheets of the UK life sector to be liquid. Most liabilities to which shareholders are exposed are long-dated, and illiquid. These liabilities are, in general, matched with highly liquid and highly rated bonds.
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