Another strong financial year for the insurance market despite navigating growing risks – LCP

LCP’s eighth annual review of Solvency II reports from 100 of the largest non-life insurers in the UK and Ireland shows continued financial growth in 2023. Our sample’s aggregate eligible own funds ratio increased to 198% as at 31 December 2023, driven by changes to UK insurers’ risk margin calculation, along with underwriting profits and improved investment performance.

Total gross written premium increased by 9% since last year, reaching £142bn by the end of 2023.

Alongside the continued growth, insurers are tackling growing risks and evolving demands in the market.

• While most insurers mentioned climate change in their Solvency and Financial Condition Reports (SFCRs), very few explicitly discussed the specific risks of physical, liability, and transition separately. One of the more frequently mentioned aspects of climate change was the increased frequency and severity of extreme weather events.
• Over two-thirds of the insurers in our sample mentioned geopolitical risk in the SFCRs. Since last year, many insurers have expanded their perspective from the specific impacts of the Russia-Ukraine war to a broader consideration of geopolitical uncertainty.
• Inflation remains a key risk for almost all firms.
• Emerging risks, such as evolving customer needs, technological advancements, data ethics, and challenges in recruitment and retention, remain top priorities for insurers.
• Three-quarters of insurers referred to cyber risk in their SFCR, mainly focused on operational risk and the heightened risk given increased geopolitical tensions.

LCP is urging insurers to consider the following recommendations to navigate the current risks.

• Enhance transparency around emerging risks – Ensure all relevant emerging risks are captured in reporting. For material risks, such as climate risks and cyber threats, explicitly address them through scenario testing.
• Develop tailored stress testing and scenarios – Move beyond high-level assumptions for key risks like cyber-attacks and inflation by incorporating specific impacts on business lines and interdependencies with other risk factors.
• Prepare for upcoming regulatory shifts – Proactively prepare for any Solvency II or Solvency UK updates and local regulatory changes, incorporating their potential impacts in disclosures and ensuring internal systems are ready for compliance.
• Integrate sustainability into risk management – Embed climate and sustainability risks more deeply into strategic and scenario planning processes, reflecting the growing importance of ESG factors.

Matthew Pearlman, Partner at LCP, said: “Despite facing a challenging environment marked by economic volatility and rising claims, overall insurers have improved their solvency, ensuring they remain well-positioned to meet policyholder obligations and navigate future uncertainties.”

Katie Garner, Senior Consultant at LCP, added: “Emerging risks in the insurance market are an ongoing challenge and threaten stability due to their complexity and interconnectedness. As changes occur rapidly, insurers must respond swiftly by implementing innovative risk management strategies and improving their resilience plans to maintain stability.”