Weathering the storm: Overcoming the challenges in the UK general insurance personal lines market

Multiple pressures creating a perfect storm

The UK Personal Lines (PL) insurance sector has faced acute challenges over the past decade, reflected in a tough competitive environment, increasing regulatory requirements and an ecosystem where, in particular, insurance carriers have struggled to maintain profitability. Recent worsening of market and economic conditions and growing regulatory pressures are exacerbating these difficulties, creating a need for action over the next 12 to 24 months to weather the storm successfully. Our report outlines what these different pressures are, and what insurers can do to tackle them.

The case for action

The numbers speak for themselves and demonstrate clearly the need for PL insurers to act now:

• inflation is expected to remain high well into 2023 (7.4% as per the latest OBR forecast);
• we expect the Combined Ratios in motor and home lines to continue to be challenging at around 100-120 throughout 2023;
• real premium growth is expected to be low to negative due to the ongoing cost-of-living crisis; and
• the costs of compliance continue to increase. We estimate the ongoing costs of new conduct regulation in relation to the additional requirements to amount to as much as £120m annually in the General Insurance (GI) industry. The overall cost of ongoing conduct regulatory compliance is likely to be well in excess of that amount.

Given this challenging outlook, it is essential that UK PL insurers assess the impact of the changing environment and ongoing business model pressures and determine the appropriate strategies to address these challenges head-on. Importantly, they should analyse the various pressures they are facing to determine both their individual and combined effects, as they are heavily interconnected.
 

Charting a path through the storm

In order to weather the storm, we argue that insurers should first consider their position in the insurance value chain and the level of risk and reward their activities bring to the business. They should then use the results of this analysis to decide which of our four key strategies to deploy, either in isolation or combination. Our four strategies are: growing through the storm, divesting non-core business, embarking on a cost reduction programme, and going niche by focusing on what the insurer does best. In all likelihood, insurers will choose a combination of some or all of these strategies. In our report, we dive deeper into each one of these strategies and what they entail.

In our view, being clear about the strategy and actions to pursue will be key to success. Acting now will not only provide insurers with a strategic advantage but will also help bring clarity for their shareholders, regulators and consumers on how they plan to navigate the difficult times ahead.

In our report, we outline several actions that PL insurers can take in order to chart a path through the storm. We summarise the strategic actions in the table below but for a more detailed analysis and comprehensive list of actions download our report.
 

Strategic actions insurers can take to chart a path through the storm

1. Value chain: Assess your position and roles in the value chain, from capacity provider to manufacturer distributor, in light of current pressures. Insurers should ask themselves: where do I have an advantage compared to the competition, which activities add value to my business, where do I have scale and are my current partnerships working?
2. Consider how the four strategies can help navigate the storm: Grow, Divest, Cut costs, Go niche
3. Risk appetite: Evaluate overall risk appetite and underwriting capacity under different economic forecasts alongside capital optimisation. This should also inform the pricing strategy, speed of rate hardening, and target markets involved
4. Innovation: Consider partnerships with insurtech, data, and technology firms to help increase actuarial precision and to improve product flexibility and innovation to satisfy customer needs better
5. Customer centric: Consider using the Duty as a potential opportunity to drive a truly customer centric approach to differentiate your firm in the market