25 September 2020Insurance

Fitch warns FCA's crackdown on pricing may hurt insurers profits

Analysts at Fitch Ratings have warned that the  new rules brought forward by the Financial Conduct Authority (FCA) to tackle high insurance prices could reduce the profitability of UK's non-life insurers.

Fitch said that UK motor and home insurers could have lower profits in late 2021 and into 2022 as they update their pricing systems and reduce their premium rates for long standing customers once new rules come into effect.

The UK regulator's proposals are likely to lead to new rules starting before the end of 2021. The FCA is consulting with the industry on a range of potential measures following a review of pricing practices in the motor and home insurance markets. The measures include a requirement for firms to offer existing customers renewal prices no higher than what they would pay as new customers, and steps to make it easier for customers to decline auto-renewals.

According to Fitch, 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.

However, it does not expect long-term structurally weaker profitability as it believes insurers will offset the price cuts for existing customers with price rises for new customers.

The agency expects the home insurance market to be more affected than the motor market because home insurance customers tend to stay with one provider, whereas price comparison websites have led to much more shopping around in the motor market. The average ratio of new to renewal business as measured by gross written premiums is about 20/80 for home insurers and about 50/50 for motor insurers.

Fitch said, "the largest companies in the home insurance market tend to have the most profitable businesses and have relied for many years on auto-renewals, often with above-average annual price rises. If it becomes easier for customers to decline auto-renewals, these companies could lose business to smaller and more agile insurers offering lower prices. Insurers that use more granular data to price risk would be best-placed to benefit from the opportunity."

"Motor insurers have a lower reliance on auto-renewals and a narrower price gap between renewals and new contracts. However, the FCA will look closely at how insurers respond to its proposed measures on pricing practices and specifically at any increased sales of add-ons, such as breakdown cover, that may offer customers poor value for money," it added. "Add-ons are an important component of many motor insurers' overall profitability."

Overall, the ratings agency expects the new rules to eventually lead to higher retention rates for insurers. "Higher retention rates, with less customer turnover, would somewhat entrench insurers' market positions, helping those with large market shares to maintain them," Fitch noted.

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