A.M. Best Europe-Rating Services Ltd. said it “does not anticipate any impact on its ratings of insurers operating in the UK as a direct consequence of the sovereign downgrade.” Best was referring to the announcement on February 22, 2013 from Moody’s Investors Service, which lowered its ratings on the UK’s domestic and foreign currency government bonds from Aaa to Aa1— the first time since 1978 that the UK’s debt issues haven’t been triple ‘A’ rated.

While Best said the country’s insurers weren’t specifically affected, it did add that the “rating action does highlight the difficult market conditions facing UK insurers. However, these conditions are already factored into individual A.M. Best ratings,”

The problem, which isn’t unique to the UK, has been slow economic growth, which Best said “is expected to remain so.” The slowdown “is curbing demand for coverage, with discretionary products, personal lines (including life business) and products dependent on trade volumes most affected,” Best said.

“The uncertain economic outlook is also making it harder to predict claims trends, which means that reserving has become more difficult. This is a particular problem for long-tail liability business, which has also been subject to higher claims frequency.”

In addition Best pointed out that “investment returns of UK non-life insurers, which tend to hold UK government or high-quality corporate bonds, remain weak and insurers are under pressure to improve underwriting performance. In the life sector, insurers have significantly shifted their focus from spread to fee-driven business, and interest guarantees have been drastically reduced.”

“Interest rates are at historically low levels, and the recent downgrade is not expected to lead to a material increase in yields on UK government bonds,” Best added. “Financial markets had already factored a possible downgrade into bond prices and demand from institutional investors for high-quality assets, as well as the potential for further quantitative easing, is expected to support the pricing of these securities.”

Source: A.M. Best