FTSE 350: Insurers braced for further claims inflation

There has already been one casualty of this pricing war, with Hastings (HSTG) warning in January this year that the dividend paid in respect of 2019 would be lower than the 13.5p a share level returned to shareholders inthe prior year. Analysts at Numis subsequently lowered their dividend forecast to 9p a share, from 11.6p. Management blamed elevated claims costs in the fourth quarter, following increases in repair and third-party credit hire costs, marginally higher winter frequencies than the prior year, and a small number of larger bodily injury losses. 

Insurers have partly attributed claims inflation to changes to the way compensation payments for those involved in accidents are calculated. In July the so-called Ogden discount rate was increased from -0.75 per cent to -0.25 per cent. Technological advancements in cars have also made them more expensive to repair than older models. 

However, premium pricing could face further pressure if the Financial Conduct Authority follows through with potential measures outlined in its pricing review of the home and motor insurance markets, published in October. The review found that 6m UK policyholders were being overcharged as a result of insurers “price-walking” them onto more expensive policies when they are renewed. Potential measures being considered included forcing companies to put customers on the cheapest equivalent deal and a complete ban on raising premiums when policies are renewed. 

The outlook for pricing in speciality insurance looks brighter for Lloyd’s of London members such as Lancashire (LRE), which reported signs of rates hardening. That is not to say there will not be some pain taken from losses associated with natural catastrophes, which included Typhoon Hagibis in October, when last year’s trading figures are revealed. That was one reason cited by Peel Hunt for lowering its 2019 forecast for Lancashire’s underwriting income by more than a quarter. It is also likely that insurers will be without the boost from investment income that aided profits during the first half of last year.