The outlook for UK general insurance remains stable, says Moody’s latest Industry Outlook report.

Adequate risk-adjusted pricing is a primary reason for the prediction, as is the rating agency’s expectation of modest real-term rate increases in most lines of business.

Personal motor insurance is an exception and will post stronger rate rises, at least in the near-term, Moody’s says.

Even though investment returns remain under pressure due to low interest rates and conservative portfolios, the profitability trends are still sufficient to maintain a stable outlook on the sector, Moody’s Assistant Vice President and report author David Masters says.

He does not expect a transformational change in profitability.

Moody’s predicts the general insurance industry’s profitability will be heavily influenced by the performance of motor and property insurance, which comprise 70% of the sector.

Personal motor insurance has been unprofitable in recent years. Double-digit year-on-year rate increases have not made up for the adverse effects of bodily injury claims and claims “farming” by lawyers.

As these stronger rates flow though, the combined ratio on motor insurance is likely to improve to almost 100% over the next 12-18 months, the report says.

The market contracted to £14.2 billion ($22 billion) of gross premium written in 2010 from £14.7 billion ($22.7 billion) in 2006, though reported 4-6% rate increases in commercial liability and property classes are evidence that conditions are improving, Moody’s says.

“Although some business lines are showing signs of potential, we consider that the key near-to-medium term downside risk for the sector originates from the pressure exerted by the UK economy’s sluggish recovery,” Mr Masters says.

“Given this environment, we believe that insurers will likely find it challenging to grow their revenues, while a prolonged economic downturn within the UK economy would pressure both insurers’ net revenues and profits.”