At the Fitch Ratings Insurance Roadshow 2020, Ekaterina Ishchenko, director at Fitch Ratings provided an overview of the fundamental sector outlook of both the UK non-life company market and the London market. While the outlook for the London market specifically is currently stable, as pricing conditions improve and underwriting results are likely to improve, she said, the outlook for the UK non-life company market is negative overall.
This, Ishchenko said, is a reflection of Fitch’s expectation that underwriting profitability in this sector is likely to deteriorate further. The central reasons for this expectation, she outlined, boil down to three specific concerns: elevated claims inflation, a weak pricing environment and a high level of regulatory scrutiny.
The latter of these concerns is particularly relevant considering the recent investigation by the FCA which looks into dual pricing practices within the sector, she said, detailing how personal lines insurers have been subject to a high level of scrutiny from regulators for a number of years.
Read more: Evaluating insurance pricing practices
During her presentation, Ishchenko highlighted several of the most notable market studies and rules introduced within the insurance sector since 2014 from the FCA’s call for input on big data in retail general insurance in 2015 to Lloyd’s of London’s market-wide profitability review in 2018.
The interim report on insurance pricing practices published by the FCA found that the household and motor markets are not working for the benefit of consumers and that the most loyal customers are being consistently overcharged by insurers, Ishchenko said. She described how this, in conjunction with the regulator publishing a number of measures they are looking to implement to reform the market, has changed the regulatory landscape of the UK non-life sector.
Ishchenko said that the concrete measures that the FCA will be detailing when it publishes its final findings in the first quarter of 2020 will likely affect household insurance more severely than motor insurance. This, she said, is due to their differences in pricing for new versus old business, and the increased utilisation of price comparison websites in motor insurance, which shields insurers from some of this impact.
“It is hard to say what kind of measures the FCA will finally recommend,” she said, “but there will be some negative short-term impact on profitability as insurers adjust their prices.”
Despite the uncertainty in the sector regarding the FCA’s pricing practices remedies and the impact that these will likely have, Ishchenko outlined the opportunity which is open to insurers who are agile and who wake up to what is happening in the market in terms of pricing to boost their market share.
In the household market, intense competition is eroding profit margins, she said, as aggregators continuously increase their share as a distribution channel thus making pricing more transparent. Meanwhile the motor insurance sector is faring no better and this is mainly due to high claims inflation, she said, with the two main drivers of this being property damage and accidental damage, which together account for 49% of claims.
Earlier at the roadshow, CEO of general insurance at Aviva, Colm Holmes, noted the impact of the substantial increase in the cost of car repair on this sector, and Ishchenko highlighted that this is a trend being seen not only in the UK but throughout Europe. High claims inflation throughout 2020 may also be driven by the weakening of the pound, she said, which will have resulting impacts on labour costs and the costs of importing spare parts.