In Insurance Times’s October 2020 issue, Fitch Ratings’s director of EMEA insurance Katia Ishchenko discusses how regulatory changes could affect personal lines insurers and brokers
The UK insurance market has always been characterised by a high level of regulatory scrutiny and, as a result, high regulatory costs, but 2020 has seen the new highs of regulatory scrutiny and intervention, which we expect will remain high into 2021.
Since its foundation in 2013, the FCA has conducted multiple studies across the non-life insurance sector, looking to ensure that insurance products and services provide value for money for customers. The regulator’s market studies included reviews of the personal lines insurance market that comprised reviews of price comparison websites, renewal processes and addon products along with a review of the wholesale insurance broker market in the London market.
This year has seen two high profile regulatory interventions – the outcome of the pricing practices review in home and motor insurance markets and the FCA business interruption (BI) test case in the wholesale specialised insurance market, which will both have significant impact on insurers.
In September, the FCA published its final recommendations on pricing practices proposing to ban current dual-pricing strategies, where new business discounts are compensated by price increases on renewal, leaving customers who don’t shop around at a disadvantage. The FCA is consulting with the industry on a range of potential measures, including a requirement for firms to offer existing customers renewal prices no higher than what they would pay as new customers, and steps to make it easier for customers to decline auto-renewals.
The new rules that are likely to be in place before the end of 2021 will lead to a complete overhaul of insurers’ pricing strategies as, currently, the entire market relies on dual pricing. This will involve insurers updating their IT systems to support new pricing rules and potentially rethinking their distribution strategy, too. We believe UK motor and home insurers could have lower profits in late 2021 and into 2022 as a result of new rules as insurers update their pricing systems and reduce their premium rates for longstanding customers.
However, we do not expect long-term structurally weaker profitability as we think insurers will offset the price cuts for existing customers with price rises for newer ones. 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. We also expect the new rules to eventually lead to higher retention rates for insurers.
High court judgment
The wholesale insurance market has also been shaken in September as it received the outcome of the High Court judgment on the test case brought by the FCA to help clarify the validity of claims for a narrow set of policy wordings linked to applicability of BI coverage related to the pandemic.
Insurers may now have to pay BI claims that they originally rejected on the grounds of policy wording, although some elements of the ruling are being appealed against by insurers so it could take several months for a final ruling. BI insurance is primarily designed to cover losses from business interruption due to property damage.
Other causes, such as infectious diseases, are typically specifically excluded. However, policy wording is crucial and a number of UK insurers sold policies that specifically covered BI in cases of an infectious disease, a government action in an emergency, or some combination of the two.
The test case brought by the FCA, which took the position of policyholders, focused only on policy wording that specifically mentioned certain inclusions for infectious disease and/or related government actions. Insurers had denied coverage on these policies under various arguments that the BI coverage did not apply in the case of the coronavirus and related government actions.
Importantly, the test case did not specifically consider any other forms of policy wording, nor did it explore issues such as the general enforceability of the property damage trigger or specific pandemic exclusions. BI claims will likely be one of the main costs of the pandemic for the UK non-life sector, along with claims for event cancellation.
They will affect underwriting results over the rest of the year and may not peak until 2021, particularly in cases where litigation is involved. Most BI cover in the UK is provided by London market insurers, including Lloyd’s of London.