Impact on ratings post-Insurance Act will remain neutral, says S&P

The implementation of the Insurance Act 2015 will not affect the ratings of UK insurers, according to S&P Global Ratings.

The Act, which affects every single commercial policy and is considered to be the biggest change in insurance law in over 100 years, seeks to address an imbalance between policyholder and insurer, which some commentators claim previously favoured insurers.

S&P believes insurers will see a minimal impact on their overall financial risk profiles and credit risk due to the relatively low implementation costs of the Act, as well as the fact a similar law was implemented for personal lines – the Consumer Insurance (Disclosure and Representations) Act 2012 – in 2013.

S&P, which believes the impact of the act will be neutral in the next 12-24 months, observed that some insurers have already incurred modest additional costs as they revised their underwriting guidelines or processes and procedures ahead of time.

S&P suggested those insurers who have already made some changes were able to test their underwriting decisions before the Act came into effect and are therefore in a better position than less-prepared peers.

The ratings agency highlights the fact that insurers will also be able to ‘contract out’ of parts of the Act, which means that parties can agree contract terms which are less favourable than those in the Act, under certain conditions.

To opt out in this way, the Act states that insurers must "take sufficient steps to draw the disadvantageous term to the insured's attention before the contract is entered into or the variation agreed" and "the disadvantageous term must be clear and unambiguous as to its effect."

Looking forward, S&P suggests proactive risk management will be key to underwriting and pricing success. Enterprise risk management frameworks will support underwriters, claims handlers, and all departments involved in information sharing, risk assessments and risk underwriting within each organisation.