By Daniel Sacks, Analyst - Insurance Consulting, LCP
We consider how soft market dynamics can impact expected loss ratios, challenge the validity of our current understanding of macroeconomic volatility, and explore how the potential increase in dryness in the UK, along with associated wildfire risks , should be incorporated into models.
What pressures are prospective loss ratios likely to come under due to the impending soft market, and how should actuaries adjust?
As the UK general insurance market continues to soften in 2025, insurers must prepare for mounting pressures on expected loss ratios. After several years of premium inflation driven by supply chain disruptions, claims inflation, and regulatory shifts, pricing in some lines is beginning to stabilise (1). However, this stability signals increased competition, with insurers likely to chase market share through rate reductions.This is a particularly acute risk for personal lines products, which typically have lower profit margins .
Actuaries should respond by stress-testing loss ratios under more aggressive pricing scenarios, with the view to implementing mitigation strategies for the most material risks where possible. This includes modelling the impact of reduced underwriting margins, increased frequency of claims due to relaxed underwriting standards, and potential adverse selection. Scenario testing should also consider the lag between pricing changes and the emergence of claims, particularly in longer-tailed lines of business.
Finally, actuaries should revisit the parameterisation of premium risk. Historical data may not accurately reflect current market dynamics, and assumptions regarding rate adequacy and claims inflation should be revisited. Ensuring assumptions that underpin model calibration reflect the forward-looking view of risk, and that validation is appropriately targeted, are essential to maintaining realistic model outputs.
Is our perspective on macroeconomic volatility still valid, for instance, in the face of increased tariffs, and what adjustments might we need to make to our ESG output to account for the current environment?
The macroeconomic landscape in 2025 remains highly volatile, with persistent inflation , geopolitical uncertainty, and fiscal tightening shaping the risk environment. While the Bank of England is expected to reduce interest rates gradually, inflation remains stubborn , and consumer confidence is recovering only cautiously (2). For actuaries, assumptions must be carefully considered to ensure they accurately account for future volatility.
Traditional calibrations of Economic Scenario Generators (ESGs) may overstate the strength of mean reversion in inflation or understate the strength of policy shocks , such as tariff escalations or supply chain disruptions. These risks are no longer tail events and should increasingly be part of the central scenario. Actuaries should, therefore, revisit the calibration of inflation, interest rate, and investment return volatilities, ensuring they reflect current macroeconomic sentiment rather than historical norms.
Scenario testing should also be expanded to include geopolitical events, such as trade restrictions or energy price shocks. These can have potentially material second-order effects on claims inflation, for example, in motor and property lines, where parts and materials are globally sourced.
From a governance perspective, ESG outputs should be reviewed more frequently for ongoing appropriateness, with clear documentation of expert judgement and rationale for any overrides. This robust governance will help to instil confidence in models and ensure they remain appropriate in a changing and challenging risk landscape.
How will dry and/or warm summers in the UK, and potentially wildfires, be factored into models?
The UK’s climate is changing, and with it, the risk landscape for insurers is evolving. Warmer, drier summers are becoming more frequent , increasing the likelihood of wildfires and subsidence events (3) . While these perils have historically been peripheral in UK capital models, 2025 could mark a turning point in how they are treated.
Subsidence, driven by prolonged dry spells, is a growing concern in the UK. It is already a material peril for UK property insurers, and climate projections suggest increasing frequency and severity. Actuaries should ensure that internal models reflect updated exposure data, soil type distributions, and claims experience from recent dry years . Calibration should be stress-tested against extreme weather scenarios, including multi-year droughts.
Wildfires are another credible emerging peril in the UK, with the London Fire Brigade urging custodians of large, open areas to introduce fire breaks after a dry spring (4) . The dry summer of 2022 saw over 20,000 wildfires in England alone , and recent years have shown similar patterns (3). Actuaries should consider incorporating catastrophe risk allowance for wildfires in the UK and other regions that have previously seen limited wildfire occurrence, particularly for more rural property portfolios. This may involve using geospatial data to identify high-risk zones and modelling the spread of a wildfire and loss severity through scenario-driven approaches.
Importantly, these climate risks also carry regulatory and reputational implications. The PRA’s latest consultation paper emphasises the need for insurers to integrate climate risk into capital adequacy assessments (5). This includes both physical and transition risks, and actuaries must be prepared to evidence how these are captured in model design and validation.
Conclusion and key takeaways
As insurers continue to develop their business plans for 2026, actuaries must remain vigilant to the evolving dynamics across underwriting, economic, and environmental domains. The assumptions that held firm in previous years may no longer be sufficient in today’s environment of heightened uncertainty and emerging risks. By proactively revisiting model inputs and collaborating across functions, actuaries can ensure their models remain robust, relevant, and responsive to changing market conditions.
• Monitor soft market signals: Reassess loss ratio assumptions and stress-test for pricing deterioration and adverse selection.
• Update ESG assumptions: Reflect persistent inflation, geopolitical risks, and economic shocks in macroeconomic scenarios to ensure they are modelled appropriately.
• Incorporate climate trends: Factor in increased subsidence and wildfire risks driven by warmer, drier UK summers.
• Enhance model governance: Clearly document expert judgment and validate assumptions against current data.
References:
1. https://www.consumerintelligence.com/articles/uk-general-insurance-predictions-for-2025
2. https://www.rsmuk.com/insights/advisory/uk-insurance-in-2025-inflation-tech-and-climate-risks
3. https://www.insurancebusinessmag.com/uk/news/catastrophe/uk-wildfire-risks-key-insights-every-broker-should-know-531861.aspx
4. Wildfire prevention urged by London Fire Brigade after dry spring - BBC News
5. https://www.bankofengland.co.uk/prudential-regulation/publication/2025/april/enhancing-banks-and-insurers-approaches-to-managing-climate-related-risks-consultation-paper
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