Moore Stephens: Uncertainty Persists Over Insurance Rates as Regulation Continues to Bite

Simon Gallagher: “Expect more regulation, whatever the colour of the UK government’s stripes come the General Election.”

Leading accountant and insurance consultant Moore Stephens says there is still significant uncertainty as to whether insurance rates will harden in 2010, despite the claims environment showing classic signs of worsening in some areas and against a background of sustained demand for cover. It adds that there are likely to be fewer new start-ups until the financial climate improves further, and warns that insurers and brokers are likely to face increasing regulatory demands in 2010.

Writing in the latest issue of the Moore Stephens newsletter Insured Interest, Simon Gallagher, head of the firm’s Insurance Industry Group, says, “The worldwide economic downturn has inevitably had a significant effect during the past twelve months on the insurance industry, with the main challenges divided into two distinct categories – commercial and regulatory.

“On the commercial front, there have been small signs of a hardening of rates, for example in the marine market, and there has been something of a step change in costs in the professional indemnity classes, including E&O and D&O business. Overall, risk carriers have started to become more selective in terms of appraising risk, more realistic in terms of pricing it, and more disciplined in their general thinking. The key driver currently holding rates back is the apparent ongoing supply of surplus capacity to the market, which may be an indicator that, despite the challenges, the insurance industry continues to be an attractive place for longer-term investment.

“Looking ahead, 2010 is likely to bring much of the same. Expect rates to continue to move further from soft to hard in niche areas, and risk carriers to invest more extensively in sophisticated and analytical underwriting and claims analysis. The business of insurance is claims, and the claims environment is showing all the signs of worsening amidst sustainable if not growing demand for cover, the rise in quality, and the number of buyers willing to protect their assets heavily in tough economic times. Expect even fewer new start-ups until the financial climate improves further. Expect insurance to remain an increasingly international business, with growth hot-spots centred on the emerging markets in China and South America. Expect increased speculation about whether solvent schemes still represent a viable exit route for companies in the insurance sector following the landmark ruling of the UK courts in the Scottish Lion dispute. And expect more regulation, whatever the colour of the UK government’s stripes come the General Election.”

Noting that there has been a marked increase this year in the number of ARROW visits and themed reviews by the FSA, with a strong focus on the strength and embedding of risk and capital management, Gallagher notes, “This year we have seen the chief executive of the FSA tell the financial services sector to ‘be afraid’ as the regulator intends to pursue a more direct and more intrusive policy than ever before. By and large, that is what has happened in 2009, during which we have seen a marked increase in the number of enforcement cases, primarily involving the all-too familiar failure of management systems and controls, and security shortcomings.

“The written regulations governing the financial sector are intellectually sound, and the FSA handbook is a solid body of work. What remains in doubt is the extent of the resources available to the FSA to enable it to police implementation and compliance, and the will of the commercial sector to embrace what the regulator is trying to achieve. The next twelve months may not provide the answers to these questions, but they will undoubtedly provide more evidence to show that, so far as regulation is concerned, design without implementation and enforcement is no answer at all.”

Moore Stephens LLP is noted for a number of industry specialisations and is widely acknowledged as an adviser and consultant to the insurance sector. Moore Stephens LLP is a member firm of Moore Stephens International Limited, one of the world's leading accounting and consulting associations, with 647 offices of independent member firms in 98 countries employing 21,224 people. Fee income increased in 2008 by US$353 million to US$2,237 million, a growth rate of 18.7%.