Fitch Ratings is currently exploring how UK motor and home insurers could have lower profits in late 2021 and into 2022 following new measures proposed by the Financial Conduct Authority (FCA).
Last week, the UK regulator announced a number of interventions designed to tackle high prices for customers who do not shop around for the best insurance deals.
Fitch expects that the proposals will reduce profitability in the short term as insurers update their pricing systems and reduce their premium rates for longstanding customers.
However, the agency doesn’t expect long-term structurally weaker profitability as it thinks insurers will offset the price cuts for existing customers with price rises for newer customers.
The sector’s profitability is already weak, Fitch says, therefore it isn’t viable for insurers to drastically cut prices in one area without raising them in another.
Analysts believe the home insurance market will be more affected than the motor market due to home insurance customers tending 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 is about 20/80 for home insurers and about 50/50 for motor insurers.
Even 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, Fitch suggests 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, it added.
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. Add-ons are an important component of many motor insurers’ overall profitability.
Fitch expects the new rules to eventually lead to higher retention rates for insurers. Customers who previously researched the best deal should start to find that renewal prices from their existing provider are no longer much higher than prices on offer to new customers elsewhere. Higher retention rates, with less customer turnover, would somewhat entrench insurers’ market positions, helping those with large market shares to maintain them.
Fitch’s outlook supports recent comments from S&P Global Ratings, who similarly said that the FCA’s proposals could harm UK insurers’ profitability in the short-term.
