New measures proposed yesterday by the Financial Conduct Authority (FCA), which aim to tackle unfair insurance prices for renewing customers, could harm the profitability of UK insurers, according to analysts at S&P Global Ratings.
The main proposal put forward by the UK regulator will require insurers to offer a renewal price for retail motor and home products that is no higher than the equivalent new business price for that customer through the same sales channel.
The proposals follow on from the FCA’s October 2019 report, which found that 6 million policyholders paid high prices in 2018, with many mistakenly believing their provider was offering a competitive price at renewal.
S&P expects that the actions could “radically change” the way insurers price policies for existing and new customers in a way not seen since the introduction of the EU gender directive.
However, if implemented, they could reduce some of the conduct risks hanging over the sector regarding the fair treatment of loyal customers.
As insurers are likely to be prevented from gradually increasing renewal prices to consumers over time, some home and motor insurers may see their margins erode in the short term, S&P noted.
The FCA estimates that its proposals will save consumers £3.7 billion over 10 years, which would convert to annual premium loss of £370 million for UK insurers.
However, compared with excluding the UK property and motor segments’ combined net premium income of £12.1 billion as of Dec. 31, 2018, S&P does not see this as material in the industry context.
The rating agency also does not expect the reform to an immediate impact on the rating of individual insurers, as it believes they will quickly adapt their pricing algorithms.
“We do view this as a positive development for the industry, particularly for policyholders, because the proposed rules are estimated to save them money and to protect them from unfair pricing behaviors,” S&P concluded.
“The insurance industry will also benefit, since these rules will limit the industry’s exposure to social risk factors associated with treating customers unfairly.”
Re/insurance broker Willis Towers Watson (WTW) agreed that the industry will “rise to the challenge” of the FCA’s proposed measures, but added there would inevitably be “winners and losers” following the changes.
