Financial Conduct Authority crackdown could hit profits for UK motor and home insurers, finds Fitch
Fitch Ratings has warned that UK motor and home insurers could see a drop in profits next year as the regulator, the Financial Conduct Authority (FCA), moves to end high prices for customers who do not shop around for a better deal.
The changes will be outlined by the regulator in the first quarter of 2020. But the ratings agency predicted they will have a negative short-term impact on profitability for insurers as the industry amends premium rates for established customers to meet the new rules.
However, in the longer-term structurally weaker profitability is not expected. This is because insurers will be able to offset the price cuts for existing customers with price rises for newer customers, Fitch said. The sector's profitability is already weak, so it is not viable for insurers to significantly cut prices in one area without raising them in another, the agency added.
The FCA is consulting with the industry on a range of potential measures published last week. They include limiting price rises for renewing customers and restricting or even banning auto-renewals. Fitch believes the home insurance market will be more affected because customers still tend to stay with one provider, in contrast to motor insurance, where price comparison websites have led to much more shopping around. The average proportion of new to renewal business (measured by gross written premium) is 20/80 for home insurers and 50/50 for motor insurers, according to the FCA.
Large home insurers have relied on auto-renewals for many years, often with above- average annual price rises, Fitch said. “If auto-renewals are restricted or banned, then these companies could lose business to smaller and more agile insurers that are able to offer a better price.
“More competition in the home insurance market could cause prices to decline in 2020 after modest recent rises (2 percent year on year in the second quarter of 2019, according to the Association of British Insurers). Coupled with claims inflation of 3 percent to 5 percent according to some insurers, this could put sector profitability under pressure,” the ratings agency said.
While motor insurers are likely to be less affected, given their lower reliance on auto-renewals and narrower price gap between renewals and new contracts, they could be affected if the FCA decides to limit the sale of add-ons, such as breakdown cover, Fitch explained. Add-ons are “an important component of their overall profitability”, the agency said.
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