New measures proposed by the Financial Conduct Authority (FCA) following a report on competition in the UK motor and home insurance markets could impact profits in 2020, according to analysts at Fitch Ratings.
Last week, the UK regulator raised concerns that competition was not working well for all consumers, estimating that around 6 million policyholders are not getting a good deal on their insurance.
In particular, the FCA was critical of companies that charged higher prices to consumers who do not switch policies regularly or negotiate with their provider.
Measures that could potentially be implemented in response to the report include banning or restricting practices like raising prices for consumers who renew year on year, or requiring firms to automatically move consumers to cheaper equivalent deals.
The FCA also recommended halting practices that discourage switching, and forcing firms to be more clear and transparent in their dealing with consumers.
Fitch believes that such actions will have a negative short-term impact on profitability as insurers update their premium rates for longstanding customers accordingly.
However, it does not anticipate structurally weaker profitability in the longer term, as analysts think insurers will be able to offset the price cuts for existing customers with price rises for newer customers.
The sector’s profitability is already weak, Fitch noted, so it is not viable for insurers to significantly cut prices in one area without raising them in another.
The rating agency also predicts that the home insurance market will be more affected by a crackdown on pricing, because customers still tend to stay with one provider, compared to motor insurance where the use of price comparison websites is more common.
“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,” Fitch explained.
“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 therefore cause prices to decline in 2020, which, coupled with high claims inflation, could put sector profitability under pressure.
“Motor insurers are likely to be less affected given their lower reliance on auto-renewals and narrower price gap between renewals and new contracts,” Fitch continued.
“However, they could be affected if the FCA decides to limit the sale of add-ons, such as breakdown cover, which are an important component of their overall profitability.”











