Fitch Ratings has warned that new UK legalisation could lead to more intense price competition and slimmer margins across the commercial insurance sector.
The Insurance Act, due to take effect in August, will make it more difficult for an insurer to refuse a commercial insurance claim because of insufficient disclosure. It also prevents firms from refusing to pay a claim if a business customer did not fulfil a requirement unrelated to a claim. For example, an insurer couldn’t refuse a flood damage claim if a customer failed to install a required number of smoke alarms as part of the policy.
Additionally, the Enterprise Act, which will come into effect next year, will give customers the right to sue for damages caused by a late payment, leading to the faster processing of claims.
Now, Fitch has warned that combined, these changes have the potential to increase the number of claims paid and subsequently prompt a rise in insurance premiums to cover additional costs.
However, Fitch has warned that more substantial damage will come from how this effects competition. The tighter restrictions will lead to increasingly similar speeds of settlements and perceived fairness of settlements; two key factors customers consider when planning on making a purchase. This leaves price as the deciding factor for customers, and insurers may not have room to cover the increased costs.
The rules will hit commercial property insurance particularly hard, it states, where margins are already slim. While the biggest players can probably absorb the extra expense, the smaller and more focused insurers might not.
Nevertheless, Fitch did find a positive in the new regulations. The Insurance Act is likely to reduce ‘data-dumping’, where a customer discloses a large amount of information whether relevant or not. Having to sort through less data could reduce some costs – however, Fitch says this is unlikely to be enough to offset the extra expenses.
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