BI notes that a 2022 rule change on auto and home-insurance pricing was followed in July by Consumer Duty regulation. Direct Line's H1 auto operating-profit loss of £180 million illustrates the pain that will likely spread to other insurers.
Kevin Ryan, Senior Insurance Analyst at Bloomberg Intelligence, commented: “Claims inflation will likely define earnings in 2023 for UK auto and home insurers. A toxic combination of higher used-car prices, increased third-party claims, longer repair times and costlier auto parts will likely significantly boost claims costs, crimping earnings. Similar claims pressures are likely in home insurance. Sabre Insurance Group estimated auto-claims-cost inflation at 12%, while Direct Line sees it at 10%. Direct Line's loss ratio is likely to deteriorate 20% year-over-year in 2022.”
Home Insurance More Profitable Than Auto
UK home insurance has historically been more profitable than auto lines, notes BI, and underwriting losses have been rare and modest in the past 10 years. Yet it seems that returns are also low when spread across the entire industry. Home-insurance premiums have been broadly steady in recent years, according to Bank of England data, at £8.9 billion in 2018 edging up to £9.1 billion in 2022.
The introduction of consumer-duty regulations in July – following the Financial Conduct Authority's ruling on general insurance-pricing practices in 2022 – is likely to squeeze UK insurers' margins. Peers in the two affected markets (auto and home insurance) had struggled to maintain profitability even before the enforcement of these potentially restrictive regulation.
Charles Graham, Senior Insurance Analyst at Bloomberg Intelligence, added: “The Consumer Duty regulations introduced by the FCA at the end of July will likely erode profit in auto and home insurance in the UK. It may also push up premiums for consumers as insurers attempt to cope with the new regulatory burden. Insurers must now demonstrate they have offered consumers appropriate products at a value-for-money price.
“The aim is to set a higher standard for consumer protection across UK financial services, though insurers will have to spend to set up the protocols and workflow processes to be able to demonstrate to both the regulator and customers that the prescribed Consumer Duty outcomes have been satisfied. This regulation could be difficult to enforce due to its subjective nature, we believe, and might not help consumers, especially as premiums rise.”
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