LCP (Lane Clark & Peacock), a consultancy firm specialising in actuarial, investment, and insurance services, has reported another robust financial year for the insurance market, despite the challenges posed by increasing risks.
According to LCP, the aggregate eligible own funds ratio for their sample rose to 198% as of December 31, 2023.
This increase is attributed to changes in the calculation of UK insurers’ risk margins, alongside underwriting profits and improved investment performance.
Additionally, LCP notes that total gross written premium climbed by 9% compared to the previous year, reaching £142 billion by the end of 2023.
Despite this growth, insurers are facing escalating risks and changing market demands. LCP highlights that while most insurers acknowledged climate change in their Solvency and Financial Condition Reports (SFCRs), only a few provided detailed discussions on the specific risks associated with physical impacts, liability, and transition.
Matthew Pearlman, Partner at LCP, commented: “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.”
A recurring theme in their reports was the increased frequency and severity of extreme weather events linked to climate change. LCP found that over two-thirds of the insurers in their sample referenced geopolitical risk in their SFCRs.
Many insurers have broadened their focus from the specific consequences of the Russia-Ukraine conflict to encompass a wider view of geopolitical uncertainty. Inflation continues to pose a significant risk for nearly all firms.
Emerging risks, including evolving customer expectations, technological advancements, data ethics, and challenges related to recruitment and retention, are also high on insurers’ agendas, according to LCP.
Additionally, three-quarters of the insurers referred to cyber risk in their SFCRs, with an emphasis on operational risk and the increased threat level due to rising geopolitical tensions.
To help insurers navigate these ongoing challenges, LCP urges them to enhance transparency regarding emerging risks by ensuring that all relevant risks are reflected in their reporting.
For material risks like climate risks and cyber threats, LCP recommends explicitly addressing them through scenario testing.
They also advise insurers to develop tailored stress testing and scenarios, moving beyond general assumptions for critical risks such as cyber-attacks and inflation, and incorporating specific impacts on business lines while considering interdependencies with other risk factors.
LCP emphasises the importance of preparing for upcoming regulatory changes by proactively anticipating updates related to Solvency II or Solvency UK, as well as local regulatory changes.
This preparation includes integrating potential impacts into disclosures and ensuring that internal systems are ready for compliance.
Additionally, LCP highlights the necessity of embedding climate and sustainability risks more thoroughly into strategic and scenario planning processes, acknowledging the growing significance of Environmental, Social, and Governance (ESG) factors.
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.”
