The announcement comes a week ahead of Direct Line’s half-year earnings, seen as a key test of its progress. The FTSE 250 insurer said it had appointed Winslow, currently head of Aviva’s UK and Ireland general insurance business, effective the beginning of next year.

It has been a tough year for Direct Line which first warned on profits last summer as rising prices for car parts and second-hand cars and other factors drove up the cost of payouts. The company scrapped its final dividend for the year as bad weather added to the pressure.

After the departure of Penny James from the top job in January, the group admitted it had “under-called inflation” and had been overly optimistic about the degree of price rises needed to offset this pressure.

Direct Line reported a combined operating ratio — a key measure of underwriting profitability that measures claims and expenses as a percentage of premiums — of 105.8 per cent last year for its ongoing operations. Anything above 100 per cent represents an underwriting loss.

Aviva’s UK general insurance business reported a 96.1 per cent combined operating ratio in 2022, worse than the previous year but still profitable.

As prices continue to rise, the key question now for the group will be whether it can get through this period without having to raise capital.

Analysts at RBC Capital Markets said Winslow’s appointment was a “tangible positive step forward in aiding the share’s recovery” but added that “the long lead time before any ensuing revamp is announced, and until its results start materialising, might mean that some patience is still required from here still”.

Winslow, who has previously held roles at US insurer AIG and is also a non-executive director at Pool Re, the UK’s state-backed terrorism reinsurer, praised Direct Line’s “rich heritage and passion for serving its millions of customers”.

“I’m looking forward to working with my new colleagues to drive growth, deliver for customers and create long-term shareholder value,” he said.

Direct Line said Jon Greenwood, its acting chief executive, had chosen not to pursue the CEO role. Its chair Danuta Gray said Winslow “stood out for his strategic understanding of the sector, outstanding record of leading high performing businesses and his focus on driving operational excellence to consistently meet customer needs”.

Aviva said it had moved the chief executive of its Canadian business, Jason Storah, to fill the gap left by Winslow’s departure. Storah has almost 20 years of experience at the FTSE 100 insurance group.

This story originally appeared on: Financial Times - Author:Ian Smith

The payout ranks among the largest for sexual discrimination at a City company. It is another mark against London’s specialist insurance sector, where hundreds of people have reported sexual harassment in recent years in a male-dominated market, which has struggled to shake off a reputation for chauvinistic behaviour.

Julia Sommer, who worked in London as a political risk underwriter for the Zurich-based insurance and reinsurance group until she was made redundant two years ago, had her complaints for sex discrimination, maternity-related discrimination and sex-related harassment partly upheld by the tribunal, which found in her favour last year. 

Judges accepted that Robert Llewellyn, then global head of Swiss Re’s political risk and trade credit team, had told Sommer in 2017 “I bet you like to be on top in bed”, and “If I had breasts like yours I would be demanding too”. 

Llewellyn denied making these remarks, and alleged in return that Sommer had made derogatory comments about her relationship with her husband, including that she was looking for an “open relationship”. 

Sommer’s husband, who was representing her at the tribunal, called these allegations “false, inflammatory and scandalous”, and said that the couple had been trying to start a family at this time, according to tribunal filings.

Judges concluded that Llewellyn had “exaggerated” another statement made by the claimant about having an open personality into “an allegation which we found was meant to denigrate the claimant and undermine her evidence”.

The tribunal also decided that on another occasion — where Sommer was told to “shut up” and to take a “more submissive role” — she would not have faced the same treatment if she were male.

“The language was based on how he felt the claimant should behave as a junior female underwriter, he would not [have] had a similar view of a male underwriter,” the tribunal said. However, it also dismissed other claims of victimisation and unequal pay.

Swiss Re said it was “aware of this judgment, which is self-explanatory and which we have given careful consideration to”.

Llewellyn, who has since left Swiss Re, could not be contacted for comment. A lawyer acting for Sommer did not respond immediately to a request for comment.

Last year, a former BNP Paribas employee — who said she had a witch’s hat left on her desk after a night of heavy drinking — won £2mn after judges decided that the French bank had unfairly discriminated against her because of her gender.

This story originally appeared on: Financial Times - Author:Ian Smith

An estimated $22bn of US corporate pension liabilities were shunted over to insurance companies in the first half of 2023, while more than £20bn were publicly announced in the UK, according to a report from the UK’s Legal & General, one of the providers in the market. Both totals represent record hauls for the first half of the year.

Higher interest rates have sharply improved solvency levels for workplace pension schemes, making a so-called bulk annuity deal affordable for many more businesses, and testing capacity in the market. In such deals, companies pay a premium to transfer a chunk or all of their pension obligations off their balance sheet to an insurer.

Andrew Kail, chief executive of L&G’s institutional retirement division, said the market had reached an “inflection point” and the insurer “had been busy gearing up for increasing demand”.

The UK sector registered its biggest transaction on record earlier this year when insurer RSA, a unit of Canada’s Intact, announced that it had agreed to offload £6.5bn of its pension liabilities to Pension Insurance Corporation.

“The pipeline for the remainder of 2023 and beyond is the largest we have seen, and we are not alone in anticipating record market volumes for the full year,” L&G said on the outlook for its domestic market. The full first-half total, including unannounced deals, could have been as high as £25bn, it estimated, close to the £28bn transacted across the whole of 2022.

In a sign of the capacity squeeze on the UK market, L&G added that “insurers are having to prioritise cases that give them the best chance of securing a transaction and may not be able to quote on everything”.

In the US, volumes are being driven by $1bn-plus transactions. L&G said there were four such deals in the first half of 2023. They included AT&T, which said in May it had offloaded $8bn of its pension obligations to US insurer Athene.

“We are expecting a similar number of large transactions to close in the second half of the year,” L&G said. Still, it cautioned that the number of large deals would have to increase to eclipse last year’s $52bn in overall deal value.

Regulators have raised concerns about the pace of buyouts, whether providers were being tempted to do deals outside their core expertise, and the risks of some of the reinsurance deals that they are building into transactions.

In a speech earlier this year, the Bank of England’s Prudential Regulation Authority, which oversees insurance companies, called for moderation “in the face of considerable temptation” to do deals.

This story originally appeared on: Financial Times - Author:Ian Smith

The insurer is one of a number of such groups, including Tokio Marine and Zurich, that have refused to pay out on Greensill’s credit cover.

Sydney-based IAG, which detailed the aggregate figure for the first time in its annual report on Monday, faces multiple Australian legal cases from investors in Greensill-sourced debts.

Greensill had arranged trade credit insurance through Bond & Credit Co — the underwriting agency in which IAG formerly had a 50 per cent stake — to cover contracts in case of default. By its end, Greensill had $10bn of insurance arranged by BCC covering the debts it packaged up for investors.

IAG has previously denied it has any “net” exposure to the BCC policies signed with Greensill Capital and Greensill Bank, saying it passed this to Tokio Marine, which bought the BCC unit in 2019.

Still, the Australian insurer has set aside A$467mn to cover legal fees and claims handling related to the cases, according to its report.

Australia’s federal court is expected to start formal proceedings on a series of insurance claims from Greensill creditors in the coming months. The litigation is seen as an important test of the validity of insurance when policies are heavily contested on the basis of alleged misrepresentation.

Greensill was a supply-chain lending company led by Lex Greensill and advised by former UK prime minister David Cameron. The company collapsed two years ago after its insurance expired, sparking a political and financial scandal.

IAG has said in its legal filings that it is not bound by the policies signed between BCC and Greensill as the cover agreed was in breach of limits set on the unit. It has also argued that if it is deemed to be bound by the disputed BCC policies, it is not liable for the sums sought by creditors.

Investment companies including Credit Suisse and White Oak have challenged the insurers’ arguments that the policies are invalid in legal filings.

IAG’s annual report noted that investors had made a series of allegations against various parties, including that BCC breached its underwriting authority and that Greensill entities had engaged in “misleading or deceptive representations”.

The insurer said it would take “a number of years” to resolve the outstanding litigation and that it was also managing claims issued by BCC unrelated to the Greensill policies.

IAG added that if the court ruled it had to pay out on the insurance, it would rely on the 2019 agreement to pass the credit insurance exposure to Tokio Marine. However, IAG warned that those agreements could also be challenged. 

In its response to one of the Greensill-related claims, IAG said part of the reason it would not pay was that the insured debts were “many steps removed from an underlying, real-world transaction”, according to a filing seen by the FT.

IAG also said in the filing that regular information provided to it by the BCC unit “failed to disclose material information and contained substantial inaccuracies”, including not disclosing 10 policies purportedly written on IAG’s behalf by BCC.

This story originally appeared on: Financial Times - Author:Ian Smith

Oleksandr Gryban, Ukraine’s deputy economy minister, told the Financial Times that the deal was “currently being pursued and actively discussed” between the relevant ministries, as well as local banks and international insurance groups including Lloyd’s of London.

The scheme could be put in place as early as next month, and could see as many as five to 30 ships covered to travel through what he described as the “danger spot” of Ukrainian waters.

“It depends on how the structure goes and what the level of risk-sharing is going to be between the government and private insurance companies,” said Gryban.

Under the cover of Ukrainian onshore defence systems, a German/Chinese-owned cargo ship last week made the first commercial journey out of Odesa since July, when Russia warned it would consider any civilian vessel leaving Ukraine’s ports as military targets. Ukrainian officials believe their missiles can protect a corridor within 100 nautical miles of its coast.

But given the military risks, affordable insurance would be essential to reviving commercial shipping activity at any significant scale. Kyiv is being advised by professional services group Marsh McLennan, which includes consultancy Oliver Wyman and the world’s biggest insurance broker Marsh, on a pro bono basis.

Marcus Baker, global head of marine, cargo and logistics at Marsh, said that “a public-private partnership, with insurers working in tandem with the Ukrainian government, will give greater confidence to shipowners to return to delivering Ukrainian grain around the world to those countries that need it most”.

The details are still to be finalised, but people involved in the discussions said scheme would look to cover vessels going into and out of Ukraine’s ports against damage, and the risk could be shared between insurers and a local state-owned bank. 

One said that the bank could provide a letter of credit as collateral. Gryban said the public portion of the risk would likely be backed by the country’s state road fund, which was created to repair Ukrainian roads and is funded by a tax on fuel sales.

The set-up would replace a scheme that was announced a year ago, which provided war and cargo coverage for grain supplies being shipped out of Ukraine. This deal in effect expired when the treaty agreed between Russia and Ukraine broke down.

Insurance cover is vital to the global shipping industry but insuring Ukraine’s grain exports has been made vastly more risky since Russia exited the UN-brokered deal and threatened commercial vessels.

Insurers, who have been stuck with billions of dollars of losses from the war, have pushed for some form of risk-sharing as a condition of taking more exposure to the conflict area.

Lloyd’s said agreements to enable continued exports of agricultural products from Ukraine were “crucial in addressing risks to global food security” and that it continued to work to facilitate grain shipments.

This story originally appeared on: Financial Times - Author:Ian Smith

Six years on from the Grenfell fire, thousands of leaseholders in blocks of flats under 11 metres in England are facing big bills to replace cladding and make other fire-safety changes. They were excluded from the cap after the government deemed the buildings at lower risk from fire.

Amanda Blanc, chief executive at FTSE 100 insurer Aviva, told the Financial Times that the government should “definitely” consider bringing lower-level apartment buildings within the scope of the cap, adding that the 11m rule “does feel slightly arbitrary”.

“This area has been very complicated and it has taken too long to get to a solution,” Blanc added. “In the meantime, you have had leaseholders in very difficult situations. What we would do is to encourage real clarity around the rules, because I think at the moment, that is lacking.”

Her comments echo recent criticism by MPs and campaigners who highlighted the plight of thousands of leaseholders in low rises having to pay for the modifications themselves.

Campaigners said that in some cases residents were forced to pick up these costs because the block failed a fire safety assessment but in others, it was insurers who made cover contingent on remedial work being carried out.

Moreover, freeholders are allowed to pass building costs on to leaseholders, resulting in a number of recent court rulings rejecting attempts to make landlords share in the cladding bill.

This month, the FT highlighted a case involving residents at Woodchester Court and Hitcham Court in Chipping Barnet, who had to pay to remove cladding last year at a cost of £10,000 per flat. One of the leaseholders said the insurance broker acting for the block informed the residents that Aviva would cover the building only if the cladding was removed.

At the time the insurer declined to comment on specific circumstances. Blanc said it had not forced residents in blocks under 11m to carry out remedial work to get coverage.

“We are not making it more difficult for leaseholders in those buildings,” she said, adding that the group was underwriting 10,000 new leaseholders after opening up its standard property insurance policy to customers with combustible cladding two years ago.

The British Insurance Brokers’ Association trade body backed Blanc’s call for a review of the cap. It urged the government to “consider a reduction in the 11m limit as any fire claim caused by dangerous cladding poses a risk to life, a serious loss for the owner and the leaseholders and in most cases a significant cost to the insurer”.

The Association of British Insurers said that an assessment of fire risk “should look at the use and construction of the building and not be constrained to arbitrary height limits”.

In response, the government said it would investigate any cases where landlords were proposing costly building remediation work for sub-11m buildings.

“In the rare cases where work is necessary in buildings under 11m, we expect freeholders to seek to recover costs from those responsible for building unsafe homes, and not from innocent leaseholders,” it added.

This story originally appeared on: Financial Times - Author:Ian Smith

Motor insurance prices are at a record high after insurers raised their premiums to match the cost of meeting claims, which have been driven higher by parts and labour shortages.

“The market increased price quite substantially in the first half of the year, a bit over 20 per cent, and particularly in the second quarter, the price increase actually accelerated,” Admiral chief executive Milena Mondini de Focatiis told the Financial Times.

Price increases were expected to continue in the second half, but inflation should “ease a bit”, she added. The cost of second-hand cars was stabilising and repair costs, though elevated, were not rising as fast as they had been, Mondini de Focatiis said.

The group expects inflation to return to normal levels as soon as next year, with the expectation that further price increases “will just match that”.

“We are very aware there is lots of pressure on our customers,” she said, acknowledging that “insurance prices going up definitely doesn’t help” with the cost of living squeeze, and stressing the company’s services for vulnerable customers.

Admiral, one of the country’s largest motor insurers, said on Wednesday that a series of big price rises had helped revenues climb by a fifth to £2.2bn. Its underwriting margins weakened slightly, though, in what it said remained a “challenging” market.

The group’s shares were up 6 per cent in early trading in London.

Consumer groups and politicians have raised concerns about sharp rises in car insurance prices, with senior executives having to justify them before MPs in parliament. Some analysts forecast rates will continue to rise until 2025.

Separately, insurer Aviva said “strong rate increases” in general insurance had helped it manage higher costs. In its first-half results on Wednesday, the group said it expected to exceed its medium-term targets for cash generation. 

Chief executive Amanda Blanc said the group remained “focused on pricing appropriately for the ongoing inflationary environment”.

“Overall, we expect the rating environment to remain favourable across both commercial and personal lines,” she added. Blanc acknowledged, however, that favourable weather conditions in the first half that had helped underwriting profitability were unlikely to be repeated.

Aviva’s private health sales continued to advance at a time of record waiting lists for public sector health services, with sales up more than a half compared with the prior period. Blanc said the business was seeing “very strong demand”.

The group posted £715mn in first-half operating profit, up 8 per cent on the previous year’s first half and ahead of consensus analyst expectations. 

Its solvency coverage ratio — the amount of capital it holds as a percentage of the regulatory minimum — was 202 per cent, a few percentage points higher than the average forecast. It increased its interim dividend from 10.3p to 11.1p, broadly in line with expectations.

Its shares were up by 2.6 per cent in morning trading.

This story originally appeared on: Financial Times - Author:Ian Smith

L&G, the FTSE 100 insurance and asset management group, posted first-half operating profit of £941mn, down 2 per cent year on year but beating consensus analyst expectations of £834mn.

Presenting his final set of results after more than a decade at the helm, which included better than expected solvency, Sir Nigel Wilson said L&G was on track to meet its five-year targets and had been “bolstered” by growing annuity sales.

In the period, the group did £4.9bn of UK corporate pension deals in which companies pay a bulk premium to offload their pension liabilities. In the second half, L&G has so far written £1.8bn and has agreed a similar amount of deals in the US since the end of June.

Analysts said the company had put up less capital against these deals than expected. “We have scope to write up to £11bn of UK [bulk annuity] volumes and for the UK annuity portfolio to be self-sustaining again in 2023, as it has been for the last three years,” L&G said.

Rising interest rates have lifted the funding levels of pension funds across the country and put many more in a position where they can do a deal with an insurer. The surge in market activity has raised questions about the insurance sector’s capacity to swallow all these schemes, and the regulator has called for insurers to exercise moderation in how much new business they take on.

However, rising interest rates also sapped L&G’s fund management arm, pulling the value of its assets under management down from £1.29tn in June 2022 to £1.16tn.

And the insurer fared less well in its UK protection business, with new business annual premiums falling from £85mn to £76mn in what it described as an “increasingly competitive market”. But its retail business was also “bolstered” by rising individual annuity sales.

Rival Just Group, the FTSE 250 life insurer, said in its interim results it was “highly confident of comfortably exceeding” its full-year operating profit target due to a buoyant market for individual and bulk annuity sales, both boosted by higher interest rates.

Just Group’s shares were modestly higher in early trading, while L&G’s were down by just over 3 per cent, amid a broader decline in UK blue-chip stocks.

This story originally appeared on: Financial Times - Author:Ian Smith

The industry’s effort to tackle carbon emissions collectively culminated two years ago in the establishment of the Net-Zero Insurance Alliance, a UN-backed group of insurers that promised to shrink the emissions linked to their underwriting.

However, its future has been in doubt since May when a letter from 23 Republican state attorneys-general said that by setting joint targets the alliance appeared to violate antitrust laws, sparking an exodus from the group.

The legal threat came amid increasing opposition among some Republican politicians to companies and investors pursuing environmental activism, which they say is hostile to the oil and gas industry and hurting the wider economy.

Legislation designed to thwart environmental, social and governance investing and financing has been adopted in several states, including Florida and Texas.

Axa, one of Europe’s biggest insurers, was a founding member of the NZIA but left in May. Its chief executive Thomas Buberl told the Financial Times that “my job is to manage insurance and not to deal . . . with 23 attorneys-general in the US”.

It was “far more powerful” to act collectively on climate, he said, but he added: “You also have to at some point say to yourself, OK, where are your priorities? Is there a different way of getting to the same result with less hassle?” Since leaving the group, Axa has published some emission targets of its own.

Buberl’s concern was echoed by Christian Mumenthaler, chief executive at reinsurer Swiss Re, which also quit the group in May.

“It’s clear that in today’s political environment, it remains very difficult: there remains some political risk, some legal risk. Then the question is, OK, for the overall cause, how much is it adding?”

Mumenthaler said that individual companies would continue to pursue strategies to curb emissions linked to their insurance policies.

But the UN Environment Programme Finance Initiative, which backs the NZIA, said that joint action was more powerful in driving policy. It is not “something which is easily facilitated on an individual company-by-company basis”, it added.

In recent years, insurers have faced increasing pressure from activists, as well as ESG-focused investors, to stop insuring polluting industries such as coal. The move by big insurers and reinsurers to abandon collective efforts to curb emissions has drawn criticism from climate change campaigners, who claimed that the decision had more to do with a fear of losing business in the US.

Mario Greco, who heads Swiss insurance company Zurich, attacked the “lack of political support” from US and other governments for taking action on climate. Collective action by the industry on climate was no longer “possible” following the demise of the NZIA, he told the FT.

“You have to go back to what you stand for yourself, and you take responsibility for what you want to do yourself,” Greco said, adding that Zurich would stand by its sustainability commitments.

The NZIA was set as part of former Bank of England governor Mark Carney’s umbrella group, the Glasgow Financial Alliance for Net Zero. Members had collectively pledged to reduce the emissions associated with their policies and to report publicly on their progress.

Only Italy’s Generali and the UK’s Aviva are left of its eight founding members.

John Neal, the chief executive of Lloyd’s of London, the specialist insurance market, said the alliance had set more demanding targets than some US insurers could support but that it was too early to write off the industry’s trying to take collective action in the future

“You need to create a somewhat easier framework if you want it to be truly global,” he said.

Additional reporting by Patrick Temple-West

Climate Capital

Where climate change meets business, markets and politics. Explore the FT’s coverage here.

Are you curious about the FT’s environmental sustainability commitments? Find out more about our science-based targets here

This story originally appeared on: Financial Times - Author:Ian Smith

As well as climate change leading to more extreme weather events, the first-half losses were driven by the expansion of urban areas and the rising cost of insuring them, according to a widely watched study by reinsurance group Swiss Re published on Wednesday.

“The effects of climate change can already be seen in certain perils like heatwaves, droughts, floods and extreme precipitation,” said Jérôme Jean Haegeli, the reinsurer’s chief economist.

He said it was “high time to invest in more climate adaptation”, saying that “protective measures” needed to be taken for insurance to remain affordable for properties that were being built in at-risk areas.

So-called convective storms, characterised by heavy rain, strong winds and sharp temperature changes, accounted for more than two-thirds of the losses in the first half of the year and have become “one of the dominant global drivers” of insurance claims, Swiss Re said. 

The $35bn in losses from such events in the six months to the end of June compared with an annual average of $18bn over the past decade. Floods in New Zealand and Europe also contributed to the $50bn total.

Coming shortly before the start of hurricane season, the losses will deepen concerns over the industry’s ability to keep up with natural catastrophes — with annual claims exceeding $100bn seen as a “new normal” for the sector. The arrival of the El Niño weather phenomenon is expected to fuel yet-higher global temperatures.

In response to the growing bill from natural catastrophes — propelled by inflation in material and labour costs — reinsurers have demanded much higher prices for cover. In its half-year results on Wednesday, FTSE 100 insurer Hiscox said natural catastrophe reinsurance prices in North America were up 43 per cent.

The rising cost of reinsurance is squeezing direct insurers. US underwriter State Farm cited a “challenging reinsurance market” as well as “rapidly growing catastrophe exposure” when it announced in May it would cease writing homeowners insurance for new customers in California.

“We are part of a system that needs to be economically viable, and if society decides to do certain things that lead to climate change, this needs to be priced,” said Swiss Re’s chief executive Christian Mumenthaler at the publication of its half-year results last week. It increased prices for property and catastrophe reinsurance by a fifth at the July renewals.

“It is our obligation to give pricing signals back to society through the primary insurance carriers,” Mumenthaler told the Financial Times.

Overall economic losses from natural catastrophes, which include those that are not insured, came in at $120bn for the first half, with February’s earthquake in Turkey and Syria a significant contributor.

That total was more than 40 per cent higher than the average over the past decade, and close to the $123bn in the first half of last year.

This story originally appeared on: Financial Times - Author:Ian Smith

Greensill, which was founded by Australian financier Lex Greensill and counted former UK prime minister David Cameron as an adviser, collapsed in 2021 after failing to secure new insurance cover for the securities it packaged up for investors.

Before its implosion, Greensill would lend money to clients and take invoices from their suppliers or customers as collateral. The loans were then bundled into securities and sold to investors.

Greensill’s demise has already led to several lawsuits, including against its former credit insurers as investors try to recover losses.

The firm acquired a Bremen-based lender in 2014, which it renamed Greensill Bank. The lawsuit centres on payments Greensill made to Liberty Commodities that were backed by debts purportedly owed to Liberty by companies including Trafigura and ArcelorMittal. These payment obligations were then shifted to Greensill Bank.

Liberty Commodities is part of GFG Alliance, a collection of firms owned by Sanjeev Gupta, a metals magnate who was one of Greensill’s biggest clients.

The administrator for the bank claims that it has failed to receive the monies owed, which it says is an insured loss under the lender’s policy with Zurich.

According to the lawsuit, Zurich agreed to indemnify Greensill Bank in respect of certain losses from October 2018 to March 2021. Greensill Bank said it claimed on its Zurich policy in March last year but had not been paid.

White Oak, another Greensill investor, claimed in a separate lawsuit this year that some companies listed as owing Liberty Commodities money had “no transaction history whatsoever” with the group. GFG has previously claimed it could borrow against hypothetical future invoices in its transactions with Greensill.

Alongside the legal action in the High Court, the administrator for Greensill Bank is also suing other insurers in the Australian courts. If the suits in Australia are successful, any sums received will be offset against those it is seeking from Zurich, according to the London lawsuit.

In a statement, Zurich said that it believes it “has meritorious defences to the policy and the claims raised and will vigorously contest the action”.

GFG said in a statement that it had signed a term sheet on a “full debt restructuring agreement” with Greensill Bank’s administrator.

Greensill Bank’s administrator, ArcelorMittal and Trafigura declined to comment.

This story originally appeared on: Financial Times - Author:Ian Smith

Campaign group End Our Cladding Scandal has raised concerns with officials at the housing department on behalf of leaseholders in about 100 apartment blocks below 11m who face paying out for fire safety work, with some demands running into tens of thousands of pounds each.

The 2017 Grenfell fire triggered a building safety crisis affecting millions of residents in tower blocks across the country. An inquiry into the fire is ongoing but initially concluded that cladding was the “principal reason why the flames spread so rapidly”.

This has led to costly remedial works on many high rises, including the replacement of suspect flammable cladding and other measures, such as installing fire breaks and new alarm systems.

But apartment buildings below 11m in height, deemed as lower risk by the government, are not covered by legislation aimed at protecting residents from having to pay for replacing cladding, which includes pursuing developers for compensation. The rules also cap the cost of wider fire-safety work at £15,000 in London and £10,000 elsewhere.

Moreover, freeholders are allowed to pass building costs on to leaseholders, resulting in a number of recent court rulings rejecting attempts to make landlords share in the cladding bill.

In some cases seen by campaigners, these costs have been picked up by residents after their buildings failed fire safety assessments. In others, insurers have made cover contingent on remedial work being carried out even if the cladding was deemed a low threat to life because they consider it has a higher fire risk than other materials.

At one three-storey development, Brocklehurst Court in Macclesfield, leaseholders said insurer Axa, which had taken over the policy via an acquisition, had said it would only continue coverage on the basis that cladding be removed and other measures.

Residents pushed back, arguing the polystyrene-based cladding was suitable for a building of this height, and said it would cost them about £23,000 each to replace.

The cladding was not put on by the original developer and was instead installed under a government green scheme a decade ago. “This stuff would not be on if the government had not put it on,” said Julian Jones of Jones Associates, a property management company which is working with the Brocklehurst residents.

Axa said the leaseholders had offered it a timescale for remediation, which it accepted and became part of the renewal conditions. “Remediation is the only long-term solution to address the risk that has led to high premiums,” said David Ovenden, chief underwriting officer for commercial at Axa UK, stressing that the insurer had “not left any of our existing customers without insurance cover”.

Jennifer Frame, a campaigner at End Our Cladding Scandal, said smaller buildings were “no more to blame for the national building safety scandal and the failure of regulation than those in taller buildings”.

She added: “In cases where remediation of defects is essential, it is completely unacceptable for leaseholders to pay anything, let alone tens of thousands of pounds each.”

At Woodchester Court and Hitcham Court in Chipping Barnet, high-pressure laminate cladding, a material with high fire risk, was removed last year, at the cost of £10,000 per flat.

The insurance broker acting for the block informed the residents the insurer Aviva would only cover the building if the cladding was removed, according to Derek Gordon, one of the leaseholders. Replacing it will cost a further £30,000 each but some residents are struggling to afford it. Gordon described the 11m height cut-off point in the legislation as a “totally arbitrary” level.

Aviva said it was unable to comment on specific circumstances, but said in offering to provide cover it would discuss “necessary” remediation works such as to external walls.

It added: “We have taken the same approach to buildings under 11m and since April 2021, unlike many insurers, we have started to offer affordable insurance to new customers.”

End Our Cladding Scandal warned that thousands of leaseholders in small blocks across the country are likely to be facing a large bill for remediation costs.

Frame has urged the government to hold “developers and other responsible parties to account” for fixing defects, and to set up a pilot scheme to approve essential fire safety work for low-rise buildings.

A group of MPs have recently taken up the leaseholders’ cause. In June, 31 parliamentarians called on the government to extend the new leaseholder protections to buildings of all heights and to establish a fund to pay for essential work in residential buildings below 11m.

“So many people are still affected and they are the one group denied any financial assistance whatsoever,” said Labour MP Hilary Benn, who tabled the early day motion calling for a debate in the House of Commons. “It’s simply not good enough and the government must act.”

Former Conservative minister Sir Peter Bottomley, one of the backers, described the 11m rule as “a totally artificial limit”, adding: “Great numbers of leaseholders are stuck with costs they can’t easily afford and in some cases can’t afford at all.”

The government said it would look into any cases where residents were being asked to pay towards remediation work. “Any resident whose landlord or building owner is proposing costly building safety remediation for a building under 11 metres should raise it with us immediately and we will investigate,” it said in a statement.

But it insisted there was no systemic risk in sub-11m buildings and said it was looking to help by “working with the insurance industry to launch a buildings insurance scheme which will aim to reduce premiums for residents in buildings with fire safety issues.”

This story originally appeared on: Financial Times - Author:Ian Smith

Motorists were quoted an average of £776 for motor policies in the second quarter, up a record 40 per cent on the previous year, according to an index from comparison site Confused.com and insurance broker Willis Towers Watson.

“The price increases we’re seeing are so significant that it’s going to cause real financial impact to many people,” said Confused.com chief executive Steve Dukes, who called for insurers to be “as competitive as they can be” despite industry pressures. 

The second-quarter figure exceeded a previous 2011 peak of £663 to be the highest since the data set began in 2006. The methodology of the index was amended two years ago, with historic figures restated to be comparable.

Matthew Upton, interim executive director of advocacy at consumer charity Citizens Advice, said consumers were facing “price hikes from every direction, including essential services”.

The charity has estimated that one million people cancelled their car insurance last year as bills piled up, with those on universal credit especially likely to do so.

“Car insurance is an everyday necessity for so many people, whether the car is needed to get to work, take children to school, or loved ones to appointments,” Upton said.

“Now is the time for the government and insurance industry to consider bold ideas . . . to make sure no one is left stranded,” he added, suggesting discounted so-called social tariffs for people on benefits as an example.

Prices in inner London, where motorists pay the most, have now reached an average of £1,257. Young people pay even more: male drivers aged 17 to 20 across the UK saw their premiums rise by 60 per cent to £2,414 on average, according to the index.

Insurers argue significant price rises are essential given the inflation in the value of payouts on accident claims, which reflect the rising costs of labour, car parts and replacement vehicles. 

Tim Rourke, UK Head of P&C pricing, product, claims and underwriting at Willis Towers Watson, said insurers were having to deal with a “cocktail of rising costs”, including rising vehicle theft and long repair times, which are “all pushing costs above premium income and forcing insurers to play catch-up by increasing prices”. 

Rising costs have eviscerated profits for UK motor insurers. Last year represented the worst underwriting conditions in a decade, according to analysis from consultancy EY. 

Car insurance prices are expected to rise further: one recent industry forecast predicted they will not level off until 2025. Motor insurers will report their half-year results in the coming weeks.

This story originally appeared on: Financial Times - Author:Ian Smith

Just completed 35 corporate pension deals during a record first half, the company said in a trading update released on Tuesday. In such transactions, companies offload some or all of their pension liabilities, and the assets backing them, to the insurer. That was up from 14 deals in the first half last year and included its biggest to date valued at £513mn. 

David Richardson, chief executive, said the defined benefit business was going from “strength to strength” and its quotation service, which gives prices for trustees on corporate pension deals, had growing demand.

Like bigger peers such as L&G, Just has a record pipeline of such deals in what is expected to be a record year for the market. Experts estimate that about 1,000 corporate pension schemes are now well funded enough to be offloaded to an insurer, after rising interest rates closed the gap between their assets and liabilities. The surge in dealmaking has prompted the Bank of England to call for moderation from insurers in the pace of transactions.

Just’s shares rose 6 per cent in morning trading in London.

The changing monetary environment has also breathed life back into the market for individual annuities, whose rates reflect government bond yields. Years of low rates had suppressed demand for such products.

Just said sales of individual guaranteed income products were now at their strongest since the introduction of new pension freedoms was announced in 2014. They were up 54 per cent year on year to £470mn. Higher rates have made them “significantly more attractive to financial advisers and customers”, the insurer said.

The group said the imminent introduction of the Financial Conduct Authority’s new consumer duty rules — which require insurers and other financial companies to demonstrate how they are providing good outcomes for customers — would further encourage sales of guaranteed products such as annuities.

“The combination of higher interest rates and new FCA rules should further encourage advisers to re-examine the attractiveness of guaranteed solutions, especially for older clients,” said Richardson.

Analysts at RBC Capital Markets called the results a “step-change in demand for both bulk and retail annuities” and upgraded its earnings forecasts.

Jefferies said the top-line growth was “impressive”, and Just should “quite easily achieve” its full-year guidance of 15 per cent growth in underlying operating profit.

This story originally appeared on: Financial Times - Author:Ian Smith

Mark Hoban told the Financial Times that the government, which has pledged a record £5.2bn on tidal barriers and other defences by 2027, would need to increase funding still further as climate change makes flood risk worse.

The former City minister said returning to a free market for flood insurance by 2039 would depend on that extra money and action by homeowners to improve the resilience of their properties. Flood Re, the public-private initiative to support the market that Hoban leads, is set to end then.

“If you think that climate change is exacerbating risk over time, we need to go further and faster in order to see flood risk reduce,” said Hoban, who is due to step down from his role this year.

Only then would premiums for homeowners “remain affordable” when Flood Re ends, he said, adding: “We need to pick up momentum.”

More than 250,000 people have home insurance policies whose flood component is underwritten by Flood Re. Launched in 2016 and funded partly by an annual industry levy, the scheme is intended to exist only until flood risks are better managed and insurers are able to again underwrite these risks alone.

Flood Re is this week setting out its latest transition plan, detailing proposals aimed at making the UK flood resilient by 2039. They include ensuring that no new homes are built in flood-prone areas and investing more in maintaining existing flood defences and drainage systems.

According to Bank of England projections, about 2mn homes risk becoming uninsurable in 30 years’ time in the most extreme climate-change scenario, in which no additional action is taken against global warming.

Arguing that such widespread insurance problems would create instability in the roughly £1.2tn market for UK household property debt, Hogan urged banks to be “proactive” and let people borrow through their mortgage to fund resilience measures such as flood doors and placing electrical sockets higher up in homes.

He also reiterated a call for insurers to adopt “Build Back Better”, a scheme launched by Flood Re, where customers whose homes are flooded receive extra money to improve resilience as they begin repairs.

Hoban said it would be a “sign of failure on behalf of the entire system if Flood Re had to exist beyond 2039. We do have time to get this right but it does require everyone to put their shoulder to the wheel.”

A relatively quiet year for floods led Flood Re to pay out £46mn of claims in the year to March 2023, far surpassed by £52mn in premiums taken in and £135mn in levy income, according to its latest accounts.

In the same period, the scheme’s assets further grew to £772mn. Hoban said Flood Re needed to be “well capitalised” for the next period of extreme weather.

Questioned last month by the House of Commons Treasury select committee on whether a private market could realistically replace the scheme in 2039, Cristina Nestares, UK head of Admiral, said the challenge of underwriting flood risk was “not going to go away”. She added that Flood Re was “positive, and we want to find a way to continue with it”.

Charlotte Clark, director of regulation at the Association of British Insurers, said the 2039 end date reflected “the idea that, by then, the UK’s flood defences will be sorted and we will no longer be building on flood plains”.

“If those things do not happen, the demand for Flood Re will be there,” she added.

The government said that more than 500,000 homes had benefited since Flood Re was launched. “We will continue to work closely with Flood Re and industry ahead of the scheme ending in 2039 to ensure access to affordable insurance,” it said.

UK Finance, which represents the banking industry, said lenders can provide additional borrowing to help homeowners finance flood resilience measures, subject to an assessment of whether they can afford it.

“When considering funding home improvements, customers should consider a range of borrowing options, in addition to increasing their mortgage,” it added.

This story originally appeared on: Financial Times - Author:Ian Smith

Once he understood the details, he was reassured. “It was a big relief to be honest,” says the 71-year-old Shaw, a former health and safety executive. For some years, he had watched as a weakened funding position at his former employer cast doubt on whether it could continue to support the pension scheme.

In 2010, the chasm between the assets and liabilities of the Metal Box Pension Scheme — named for a Crown predecessor company — had reached £700mn. A recovery plan had been agreed, but would take almost three decades to implement.

“I was watching plants closing around Europe, and that was worrying,” he says. Coupled with the deficit, “you get worried about your pension”.

When the scheme transferred to PIC, Shaw became one of more than a million UK savers whose pension benefits are now the responsibility of a life insurance company, rather than a traditional pension fund administered by trustees and backstopped by a sponsor company.

In these deals, insurers take over the scheme liabilities — the obligation to pay pensions to retirees decades into the future — and the assets, typically government bonds and highly rated corporate debt, that have been accrued to finance those pensions.

It’s one of the few really growing markets in the UK finance sector

Activity in this once niche area of the financial sector, the so-called bulk annuity market, is at fever pitch as higher interest rates drive up scheme funding levels. That makes a buyout a more realistic option for hundreds of pension funds. 

“It’s a huge wave that is breaking now across the bulk annuity market,” says Charlie Finch, partner at consultancy LCP, which advises on deals. LCP estimates that around 1,000 schemes, nearly a fifth of the UK total, are now well funded enough to be offloaded to an insurer. “We really have seen a big step-change over the first half of this year,” he adds. In a note last year, analysts at JPMorgan estimated £600bn of the around £2tn in private sector pension obligations will pass over to insurers in the current decade.

The UK’s biggest transaction was completed earlier this year, when insurer RSA offloaded £6.5bn of its liabilities. That could yet be eclipsed if BP concludes a buyout; the Financial Times reported last week that the oil supermajor was in advanced talks on a deal. With £20bn of business concluded in the first half alone, many in the industry predict 2023 will set a new record for transfers.

Transferring pension liabilities to an insurer means that the sponsoring company no longer has to detail the pension surplus or deficit in its own accounts — or assist with any shortfall — potentially improving its capacity to borrow money, pay dividends, put itself up for sale or pursue a takeover of another company.

Bulk annuity deals are also an increasingly important source of revenue growth for listed insurers such as Phoenix Group, Aviva and Legal & General, who compete with privately owned groups like PIC and Rothesay Life for deals. 

“It’s one of the few really growing markets in the UK finance sector,” says James Carter, a bond fund manager at Waverton, which bought into bulk annuity providers’ debt earlier this year.

But the transfer of such large savings pools from a plethora of schemes to just a handful of large insurance companies raises some significant issues. In a speech in April, the Bank of England’s executive director for insurance supervision, Charlotte Gerken, cautioned that the “structural shift” in the provision of retirement income gave insurers “an increasingly important role as long term investors in the UK real economy”.

She called on them to exercise moderation “in the face of considerable temptation” and warned that some bulk annuity providers were expanding their risk appetite “outside their current core expertise”.

Transferring pension liabilities to insurers is also likely to affect investment markets. Closed pension schemes are typically heavy investors in assets that can match the duration of their liabilities, such a gilts, and while insurers take on such assets upon buyout, they tend to want a more diversified asset portfolio to back their new pension contracts.

Some supporters of buyouts say they represent an opportunity not only to reduce risks to companies, but to increase investment in national priorities such as infrastructure and housing.

But there is growing debate over the downsides of turning over pension assets, built up by savers over many years and augmented by tax relief, to insurers who will run them to generate profits for shareholders or their private-equity backers.

“Aside from the security [question], do you want to give those profits to the insurer?” asks Andrew Ward, who leads the risk transfer team at pensions consultancy Mercer.

Buyout basics

Bulk annuity deals are on the rise globally, but the UK is a particular focus of activity because it has high levels of private pension savings. Many of those are concentrated in so-called defined benefit pension schemes, which have around 10mn members. These were originally set up by employers to promise a set level of income to retirees, but improving longevity, changes to accounting rules and consistently falling interest rates have rendered them very expensive to run. Most are now closed, both to new members and further accruals of benefits.

Interest rates on government debt are the basis for calculating the estimated cost of future scheme liabilities in today’s money, and the ultra-low rates that prevailed from around 2009 until last year inflated the net present values of those liabilities and pushed hundreds of schemes into deficit. Sponsoring companies were often called upon to make additional contributions to narrow the gap, diverting cash from more productive uses.

However, recent steep rises in interest rates have led to a dramatic turnround in scheme funding. The 5,000 or so pension plans monitored by the UK’s Pension Protection Fund, which rescues schemes whose corporate sponsor can no longer fund them, swung from a collective deficit of £132bn in 2020 to a surplus of £431bn in May this year. Many are now in a healthy enough position to be transferred to an insurer, a move that safeguards benefits for retirees and relieves companies of the obligation to backstop pension promises.

“Many schemes who were expecting to get to buyout funding [eligibility] in three, five or even 10 years are there now,” says Stephen Purves, head of risk settlement with XPS, the pensions consultancy.

Insurer indigestion

But the ramping-up of buyout activity is testing capacity among insurers. There are just eight bulk annuity providers in the market and they all face constraints on how much capital they can allocate to such transactions and how fast they can hire the staff needed to administer the acquired schemes.

“People is the difficult one at the moment,” says Ward. “Insurers have relatively small deal teams and they have to do a lot of triage.” Purves adds that insurers are now struggling to keep up with demand. “Some are becoming more selective and some require exclusivity to even consider bidding on transactions.”

The PPF told a parliamentary inquiry that capacity in the market was “open to question” and that high administrative and transaction costs could be problematic for smaller schemes — leading insurers to focus resources on bigger deals.

Schemes are also facing challenges to get “buyout ready”, including ensuring data held on members’ benefits and their personal details are accurate. 

Investment consultants say a bigger issue for some schemes is getting their investments in the right shape. “Insurers are not typically keen to take on illiquid assets,” says Elaine Torry, partner with consultancy Hymans Robertson, leaving schemes needing to dispose of investments such as property, private equity or private debt, which can be difficult to sell in a crisis and may not be eligible for inclusion within the “matching adjustment portfolio” that insurers are required to use to back pension liabilities.

Marcus Mollan, annuity asset origination director at Aviva, says a promised overhaul to Solvency II, the regulatory regime for insurers, should increase the overlap between the assets pension schemes currently hold and what insurers are looking for. But those regulatory changes will not be implemented until the middle of next year at the earliest. 

In the meantime, schemes’ exposure to illiquid assets varies from 10 to 30 per cent. Many originally invested in them to help get scheme funding to the point where a buyout is feasible. One insurance executive says pension schemes are telling him it will take “two or three years” to exit such positions and some may need to shoulder a loss on disposal of up to a fifth.

Investment shifts 

The shift from company schemes to insurers is also poised to affect the dynamic of the UK’s core financial markets, investors say. Pension funds have been big buyers of gilts and index-linked gilts to back their pension promises, but insurers have different priorities and operate under different rules. They are likely to seek out higher-return investments, such as “build to rent” housing developments, that have been structured to meet solvency requirements.

This dovetails neatly with current political priorities. The UK government wants to unlock some of the tens of billions of pounds in pension savings for long-term investments in areas like social housing and infrastructure.

But market participants predict that pension fund exits will sap what has been a key source of demand for government bonds. “With the central banks stepping back and insurance companies looking elsewhere . . . that marginal buyer of [US] Treasuries and gilts is going away,” says Waverton’s Carter. 

Daniela Russell, HSBC’s head of UK rates strategy, says this shift could result in “a new investment landscape with a small group of insurers with a lot of market power”, creating “various risks regulators need to manage”. 

I’ve never met the finance director of a company in any sector that has a large defined benefit pension scheme attached to their core business that is pleased to have it

She adds that while investment in illiquid assets “is all well and good when market conditions are favourable, they need to be managed prudently as these insurers could potentially act as amplifiers of liquidity risk”.

Gerken warned in her speech that insurers “need to understand, as they take on these vast sums of assets and liabilities, how they may become greater sources or amplifiers of liquidity risk”.

Insurers have privately argued that during last year’s liability-driven investment crisis they remained resilient, while many pension funds had to sell assets or obtain loans to fund margin calls on their derivative positions. But insurance regulators have warned that life insurers could be overly optimistic about their ability to sell down in a crisis. 

Insurers’ use of reinsurance is also under the spotlight. When doing deals to take over corporate pension funds they often reinsure, in another jurisdiction such as Bermuda, the risk of retirees living longer than expected.

Some are using so-called funded reinsurance, where they pass on a slice of the liabilities — and the assets backing that slice — to a third-party reinsurer. This frees up capital for them to do more deals but regulators are pushing insurers to consider how they would manage if the reinsurer failed. They say an over-reliance on funded reinsurance could create a “systemic vulnerability” in the sector. 

Mick McAteer, a former board member of the FCA and a vocal critic of the Solvency II reforms, has publicly called for regulators to “put a hold on transfers of pension schemes to insurers until we have a full inquiry into financial practices of insurers and their ability to take on pension liabilities”.

Alternatives to buyouts

There is also a growing debate around other ways to secure the future of defined-benefit pension schemes now that the funding positions of many have improved.

One option is to keep the pension obligations — but also the potential rewards from those long-term investments and any changes in assumptions about returns and improvements in life expectancy, which have fallen in recent years.

Another proposal being considered by ministers is to consolidate hundreds of subscale pension plans into larger pools of assets that would benefit from lower running costs and greater diversification. One way to do this would be to expand the remit of the PPF, which currently only takes on corporate pension schemes after their sponsoring employer has failed.

In its recent submission to MPs, the PPF suggested around a third of the UK’s 5,100 defined-benefit schemes could benefit from this approach and that it “stands ready to support and, if needed, deliver any suitable prospective solutions to drive better member outcomes in the future.”

Insurers are nervous such a consolidation effort would divert a significant chunk of business away from the bulk annuity market. “At the very least, it would cause a hiatus in the market,” says one executive at a life insurer, who also warned that it would “slow investment in the economy, in infrastructure” and risk rendering the Solvency II overhaul “pointless”. Insurers’ promises of investment in housing and infrastructure were partly predicated on redeploying assets acquired through bulk annuity deals. 

Baroness Ros Altmann, a former pensions minister and a Conservative peer, says it would be “systemically far better to get pension schemes to run on” rather than be bought out, noting that over the decades taxpayers had “spent a fortune” in tax relief to help build up funds. “To hand them to insurers, without ensuring the money has any benefit for the UK economy, seems a real waste.”

But beyond the debates about morality, market function and asset allocation is the powerful impetus from the corporate sector to shed pension liabilities. Many executives are tired of the balance sheet volatility, the ongoing risk and potential demands for top-up payments from scheme trustees. They want out of defined-benefit pension provision and with funding levels improving, see an opportunity to make that escape, market watchers say.

“I’ve never met the finance director of a company in any sector that has a large defined benefit pension scheme attached to their core business that is pleased to have it,” says Phoenix chief executive Andy Briggs.

“As soon as they can afford to buyout, most would move to [do so].”

This story originally appeared on: Financial Times - Author:Ian Smith

The overhaul of the so-called Solvency II regime, which dictates where insurers invest and how much capital they need to hold, has been the first significant rewrite to UK financial regulation since Brexit.

The government has promised to slash red tape for the sector and unlock tens of billions of pounds of investment in UK infrastructure in a new set of rules branded “Solvency UK”. 

The Prudential Regulation Authority, the arm of the central bank that oversees insurers, on Thursday issued the first of three consultations as part of this work. It included simplifications to the so-called internal models that firms use to calculate their capital requirements, as well as other proposed changes including removing separate capital requirements for UK branches of global insurers.

PRA chief executive Sam Woods said the measures would “reduce bureaucracy, facilitate competition, and support UK economic growth and competitiveness without lowering prudential standards or weakening policyholder protection”. 

Huw Evans, partner at advisory firm KPMG and former director-general of the Association of British Insurers, a trade body, described the changes as “sensible and welcome”. He said the implementation timeline “would see the UK introducing its Solvency II reforms ahead of the parallel process in the EU”.

The PRA said the changes would be implemented by the end of next year, in line with a timetable issued last week by the government, which said other elements of the reform would arrive earlier.

In relation to the internal model, the regulator will apply a “principles-based” approach to its supervision of companies’ capital calculations, removing most of the requirements set by the EU in a reflection of the differences across member states. Insurance executives had voiced concern over the costs of and time demanded by current rules.

The consultation also set out new safeguards to ensure the soundness of firms, including circumstances where the watchdog could require a capital add-on to approve the internal model.

Other proposals included removing any reliance on models from Solvency I, the previous regime that some insurers still have to refer back to when making certain solvency calculations.

The government’s position on Solvency II was first announced in November last year after a row between the regulator, which had pushed for some of the capital requirements to be tightened, and the industry, which saw the rules as excessively conservative.

Ultimately, chancellor Jeremy Hunt sided with the industry. The PRA expects to consult in September on other elements of the Solvency II changes, which are aimed at freeing up investment in UK infrastructure and other productive long-term assets.

This story originally appeared on: Financial Times - Author:Ian Smith

The Financial Conduct Authority issued a notice on Wednesday saying the FTSE 250 insurer “must carry out” a review of total losses where vehicles had been written off, “to identify any policyholders who received unfair settlements and provide them with appropriate redress”.

Direct Line said in a notice on its website that it was working to identify “everyone affected” by underpayments on written-off cars between the start of September 2017 and mid-August 2022.

“Customers don’t need to contact us, either directly or via third parties,” the company said. “We’ll contact affected customers directly to put things right.” In a further statement the insurer said “the vast majority of customers will not be impacted”.

The review is the latest blow to one of the UK’s biggest motor insurers and follows a string of profit warnings caused by spiralling inflation in its claims costs, which prompted the departure of its chief executive in January.

The FCA said in December it had seen evidence that motor insurance customers whose cars had been written off in a crash had received payouts lower than fair market value, but did not name insurers.

“People shouldn’t need to question whether they are being offered the right amount for their written-off car or other goods that they need to replace,” Sheldon Mills, the FCA’s executive director for consumers and competition, said at the time, adding that such practices would hit people “precisely at the time they can ill-afford it”.

UK insurers have come under pressure in recent months over their treatment of customers.

Admiral this week announced it was enhancing its home insurance policy to cover the cost of accommodation for any customer who is required to evacuate their home by a local authority of the emergency services.

At a Treasury committee appearance this month, insurance executives including Admiral’s head of UK, Cristina Nestares, had come under pressure to provide such emergency relief.

Labour MP Siobhain McDonagh raised the matter of a gas explosion in her constituency where hundreds of residents were required to leave their homes, saying it was the local authority that had to spend more than £2mn on temporary accommodation.

“Is it not part of your industry to have an emergency service and an emergency offer to people?” she asked executives.

This story originally appeared on: Financial Times - Author:Ian Smith

Car insurers’ net combined ratio, which shows claims and costs as a proportion of premiums, hit 109.5 per cent in 2022, according to the latest figures from consultancy EY. Anything above 100 per cent on this measure, which is adjusted for reinsurance, represents an underwriting loss.

“It’s a long time since it has been this bad,” said Rodney Bonnard, UK insurance leader at EY. “For many people, it is not in recent memory.” 

All parts of the global insurance sector have suffered from inflation in their claims costs but motor insurers have been hit particularly hard as a sharp rise in the cost of second-hand cars, parts and labour eviscerates margins. 

This has shaken up a competitive UK market. FTSE 250 insurer Direct Line’s chief executive Penny James stepped down in January after a string of profit warnings, citing “significant headwinds”. In March, Canada’s Intact announced an exit from the UK personal motor insurance market after inflationary pressures weighed on its UK and Ireland business.

Bonnard described the factors hitting insurers’ margins as an “amalgam effect, all arriving at the same time”, as inflation combined with rising accident rates after a pandemic lull and regulatory pricing changes that made it trickier for companies to force prices higher. 

Annual premiums are now soaring as underwriters try to catch up with cost inflation, putting pressure on consumers. EY warned that it expected prices to rise 16 per cent this year and 11 per cent next as the industry strived to “rebalance its books”.

Based on discussions with insurers on their pricing strategies and other workings, the consultancy thinks that will be enough for UK motor insurers to generate an underwriting profit for 2024, achieving a net combined ratio of 97.4 per cent.

But given the significant rises in prices and costs, it was quite a “narrow runway” for insurers to achieve profitability and there was a significant degree of uncertainty on either side of that forecast, Bonnard said. 

The average annual policy for a UK motorist cost £478 in the first quarter, up 16 per cent from a year earlier to its highest since the end of 2019, according to industry figures. During the pandemic there was a dip in pricing as Covid-19 restrictions dramatically reduced car crashes and claims.

Answering MPs’ questions earlier this month, senior industry executives defended the sharp rebound in premiums, pointing to squeezed profits in the sector and the significant increase in claims costs. Motor repairs are about a third more expensive than they were last year, according to data from the Association of British Insurers.

This story originally appeared on: Financial Times - Author:Ian Smith

Rising inflation has given new momentum to a years-long rally in insurance and reinsurance prices, as insurers react to increases in the cost of rebuilding homes and repairing cars by raising the cost of cover.

This story originally appeared on: Financial Times - Author:Ian Smith