Fitch Ratings says its sector outlook next year for the UK non-life company market is “deteriorating” but prospects for the London insurance market are improving.

“The diverging sector outlooks reflect the different credit profiles of these two subsectors of the UK non-life insurance market,” the rating agency said in a brief non-rating action commentary.

Fitch says the deteriorating sector outlook for the UK non-life company market is driven by its expectation that high claims inflation and an increase in claims frequency towards pre-pandemic levels will reduce profitability.

“In addition, new pricing rules by the [Financial Conduct Authority] could lead to short-term pricing volatility in the household and motor insurance markets in 2022,” Fitch said.

“This, together with ultra-low yields, could lead to negative pressure on insurers' earnings.”

For the London insurance market, Fitch says the outlook is getting better as pricing conditions are predicted to improve further, thereby supporting the market’s underwriting results.

But it warns of potential challenges to the London market, including inflationary pressure, lower investment yields and the possibility for a longer-term impact on major loss activity due to climate change.