Fitch Ratings predicts fall in insurer profitability in 2020

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Fitch warns that the FCA's potential ban on dual pricing can lead to "significant strain" as it declares a negative outlook for UK home and motor insurers.

The outlook for UK home and motor insurers in 2020 is negative due to a high claims inflation and a weak pricing environment, according to Fitch Ratings.

The credit rating agency stated that it expected these factors to lead to a fall in insurer’s underwriting profitability.

In addition, it warned that regulatory measures to reform pricing practices could impact profitability and “put significant strain” on insurers’ business models.

Dual pricing
In October, the Financial Conduct Authority (FCA) stated that it was considering a ban on dual pricing practices, as it published its general insurance pricing practices interim report.

Fitch said in a statement: “The Financial Conduct Authority (FCA) is considering imposing limits on price rises for renewing customers and restricting or even banning auto-renewals.

“Such measures could have a negative impact on profitability as insurers update their premium rates for long-standing customers accordingly, but we think they would seek to offset this by pushing up prices for newer customers.”

The company also warned that home insurers who rely on auto-renewals for a large proportion of their profit, with many of those customers being charged more than new customers, risked losing business to more agile insurers that are able to offer a better price.

It added that motor insurers are less likely to be affected as they don’t rely on auto-renewals as much.

“However, they could be affected if the FCA decides to limit the sale of add-ons, such as breakdown cover, which are an important component of their overall profitability,” Fitch added.

Forecasts
Looking at home insurance, Fitch forecasted a combined ratio close to 100% in 2020, which it said indicated underwriting results around breakeven.

In addition, the agency expected pricing to stay weak, with increased competition being driven by new market entrants and a rise in the use of aggregators.

Meanwhile, for motor insurance the forecasted combined ratio reached above 100%, which Fitch said indicated underwriting losses, with rising claims costs outpacing premium increases.

In contrast, Fitch stated that the London market has a stable sector outlook for next year.

It added that this reflected its view that the challenges of rising claim costs and low investment yields will be counterbalanced by improved underwriting and pricing discipline.

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