UK auto and home insurers setback to continue into 2024: Bloomberg

Bloomberg Intelligence states the UK auto and home insurers face rising claims inflation and regulation struggle will continue into 2024.

Margins of UK auto-focused insurers such as Admiral and Direct Line have seen setbacks in H2 2023 and 2024, according to a new sector report by Bloomberg Intelligence.

This is due to sharply rising claims inflation, and the cost of implementing systems to comply with new consumer regulations that may not be easy to enforce. 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 2023 auto operating profit loss of £180 million portrays a phenomenon that could be followed by 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.”

However, the company noted that 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. Still, returns are low when spread across the entire industry. In recent years home insurance premiums have been broadly steady 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 which followed the Financial Conduct Authority’s ruling on general insurance-pricing practices in 2022 is likely to squeeze UK insurers’ margins, according to BI.

The two affected markets, i.e. auto and home insurance, had struggled to maintain profitability even before the enforcement of this 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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