Regulatory changes ‘will erode insurers’ profits’

Market experts warn the UK Financial Conduct Authority proposals could mean less effective competition, profit deterioration and poorer consumer outcomes.

UK regulator the Financial Conduct Authority (FCA) has proposed regulatory changes to general insurance pricing to end what it called “complex and opaque pricing practices”.

In its “General insurance pricing practices market study—Consultation on Handbook changes”, published September 22, 2020, the FCA emphasised the need for “significant reform” of how home and motor insurance are priced.

The watchdog estimates that its proposals to change pricing could save consumers £3.7 billion over the next 10 years.

Industry commentators have warned the move could mean less effective competition, profit erosion for insurers and, in fact, worse consumer outcomes.

The FCA said it wants to enhance competition and ensure consumers receive fair value, which it said would increase trust in insurance markets.

Under the proposals, insurers will be required to offer a renewal price for retail motor and home products that is no higher than the equivalent new business price for that same customer through the same sales channel.

The FCA said that six million policyholders were paying high or very high premiums in 2018 due to harmful pricing practices. The FCA said that these consumers could have saved £1.2 billion if they had paid the average price for their risk.

The proposals outline updated product governance rules that could require insurers to consider how they offer fair value to all insurance customers over the longer term, and require them to report certain datasets to the FCA so the regulator can check the rules are being followed. The FCA also wants to make it easier to stop automatic renewals across all general insurance products.

The UK regulator is seeking views on its proposals by January 25, 2021. It plans to publish a policy statement and new rules next year.

“We are consulting on a radical package that would ensure firms cannot charge renewing customers more than new customers in future, and put an end to the very high prices paid by some long-standing customers,” said Christopher Woolard, interim chief executive of the FCA.

“The package would also ensure that firms focus on providing fair value to all their customers.”

“Central to any effective adaption strategy will be strong portfolio management and governance.”

Stephen Jones, Willis Towers Watson

Industry response

Willis Towers Watson responded that the proposed changes will mean significant changes to pricing practices for insurers and intermediaries.

“The FCA’s paper will raise as many questions as it answers. One of the biggest challenges for insurers and intermediaries alike is managing the implementation transition given current market competitive pressures, and therefore deciding how and at what point price changes should be made,” said Graham Wright, the company’s UK P&C pricing product claims and underwriting lead.

Wright argued that stopping firms’ price optimising completely could lead to “less effective competition and worse consumer outcomes overall”.

He said: “The report appears to effectively provide an endorsement for the use of complex modelling and price optimisation techniques, stating that most significantly, it can allow firms to compete by offering different prices and products to different consumers.

“This can benefit consumers if it allows firms to offer a range of choice and better deals.”

Stephen Jones, UK P&C consulting lead at Willis Towers Watson, added: “As with any regulatory change, there will be winners and losers within the industry, and the winners will be those with the ability to flexibly adapt their pricing strategy.

“Central to any effective adaption strategy will be strong portfolio management and governance, the need for greater operational efficiency, the ability to report clearly on the adherence to the remedy and flexible deployment.”

The FCA proposals were described as “credit negative for home and motor insurers’ revenues and profit margins” by Moody’s senior credit officer Dominic Simpson.

“The proposal to cap renewal prices by tying them to the equivalent new business price will restrict insurers’ ability to increase prices amid rising claims inflation,” Simpson said.

“In theory, insurers could respond by raising new business prices, but competitive pressure may limit their scope to do so, ultimately leading to profit erosion.”

Fitch Ratings agreed that the proposals could hit insurers. It said UK motor and home insurers could see lower profits in late 2021 and into 2022 as they update their pricing systems and reduce their premium rates for long-standing customers when new rules come into effect.

The credit ratings agency warned that the sector’s profitability is already weak, so it is not viable for insurers to significantly cut prices in one area without raising them in another.

Image: Shutterstock / Galyna Andrushko

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