Analysts at AM Best believe that insurers with strong brands and market reputation will be the most likely winners of the FCA’s recent proposals to tackle unfair pricing practices.
Last month, the UK regulator announced a series of interventions that aim to stop insurers hiking the price of motor and home products for renewing customers.
There have been concerns that the move could stunt profits in these lines and put further financial pressure on insurers, although others believe the measures will improve the market’s health over the long term.
AM Best suggests that younger and more financially secure policyholders could face higher prices for personal lines products due to the FCA’s proposals, which are likely to lead to reduced levels of price competition and discounts.
“If its recommendations are implemented as proposed, insurers would have to charge renewing personal motor and home policyholders the same price as new customers pay for the same cover,” analysts noted. “These measures would also apply to any products and services issued in conjunction with the policy, such as premium financing income.”
As a result, AM Best believes that, in order to meet profitability targets, insurers will need to increase the prices applied to new business to offset the impact of lower renewal premium.
Without an increase in new business pricing, underwriting profits will fall and an aggregate underwriting loss will likely become a feature of the UK personal lines market, the rating agency said.
The measures may also increase the barriers to entry into the UK personal lines market, as the ability for new entrants to attract customers through new business discounts will be severely reduced.
With reduced flexibility for insurers to provide new business discounts, AM Best argues that other aspects of business profile are likely to play an increasing role in the decision-making process of both potential and established customers.
This suggests that brands currently enjoying high levels of recognition and customer satisfaction will be best positioned to take advantage, as policyholders begin to take more notice of a company’s customer service levels, the experiences of other policyholders, and metrics such as claims approval ratios.
Additionally, AM Best noted that the customers most likely to auto-renew their policies are older customers or those that are less financially literate.
This means that, on average, prices for younger and more financially literate policyholders will be set to rise steeply to offset reducing renewal margins.
Younger drivers, who generally already pay high premiums for motor insurance, could be particularly affected as the benefit of switching may be dampened by insurers no longer offering lower cost introductory offers, analysts said.
