UK law change could lead to more competition: Fitch
Rating agency Fitch has warned insurers that new UK legislation may lead to more intense price competition and slimmer margins for the commercial insurance sector.
The Insurance Act, which is due to take effect in August, will make it harder for an insurer to refuse a commercial insurance claim due to insufficient disclosure.
The rating agency said it will also prevent firms from refusing to pay if a business customer breached a requirement of the policy that was entirely unrelated to the claim, such as if the customer failed to install required fire alarms, but then claimed for a loss from flooding.
Separate from this legislation, the Enterprise Act, which will come into effect next year, will give customers the right to sue for damages caused by a late payment of their insurance claim.
Fitch expects the new laws to result in fewer disputes over commercial insurance claims and an increase in the number of claims paid.
It suggests that when claims are disputed, insurers may also attempt to deal with them quicker to reduce the risk of being held liable for damages. Overall claims costs will therefore rise and insurers will increase premiums to compensate.
Fitch also expects these developments will also reduce the variation in the industry in the speed and perceived fairness of settlements, which are two of the key factors customers cite when assessing quality of service.
“With less ability to differentiate on service, price competition is likely to increase, meaning firms are unlikely to be able to increase premiums enough to fully offset the higher costs. Higher overall premiums are also likely to make some customers such as small and medium enterprises even more price-sensitive, adding to the effect,” said the rating agency.
One positive impact for insurers, according to Fitch, is that the Insurance Act should reduce the prevalence of data-dumping, where a customer discloses large amounts of information without attempting to determine whether it was relevant.
Fitch concludes by suggesting less data-dumping could reduce costs for the insurer if they no longer need to wade through disclosure to identify the pertinent risks. However, it said this would not be enough to offset weaker underwriting margins.
