ILC ARTICLE

New regulations to bring even greater disruption

22nd November 2021

While no one doubts that Covid and Brexit have posed major challenges for insurers in terms of supply and inflation, even greater disruption is coming down the road.

According to Gary Barker, Claims Director, The AA, the introduction of the General Insurance Pricing Practices Regulation on 1 January 2022 will cause deeper shockwaves than anything else the industry has experienced in the last 18 months.

Speaking at the I Love Claims Home & Property Claims Conference, which took place at the CBS Arena, Coventry, on 11 November 2021, he said the new regulation would force a substantial change in approach to pricing, and every single insurer would have to adapt.

Strong Intervention

“I can’t think of another occasion when a regulator has made such a strong intervention into how an industry trades,” he told delegates in Coventry.

Essentially, the new regulations are intended to protect existing policyholders who are often charged more at renewal than new customers who benefit from heavily discounted quotes. But while admirable in theory, Barker warns of unintended consequences.

He said, “The insurance market in the UK is arguably the most competitive in the world, with price comparison website driving lower prices. The downside of that is that household insurance is now almost entirely sold on price, and because first policies are heavily discounted – insurers may need to have you as a customer for three years before they make a profit – it means the longer you have an insurance policy the more they cost. But the Financial Conduct Authority is ending that practice, which means prices will simply have to go up.”

He is predicting a rise of between 20% and 40%, although no underwriter could risk hiking prices that much immediately so it’s likely to be a gradual process.

Backlash

However, the challenge will be adjusting to these new regulations without suffering a customer backlash. Already three quarters of home insurers in the UK are not making a profit, with an average combined operating ratio for the market of 108%.

Barker says the only solution is to become leaner both operationally and in process. He points to an excess of intermediaries benefitting from margins of up to 20%, and urges large insurers to learn from new entrants, who are not weighed down by legacy systems and therefore able to use technology to increase efficiencies in all areas of the business.

“They’re more efficient and are meeting customer expectations by communicating with them on a single platform. That is vital, we need to get the customer, supplier and insurer all talking in the same place.”

Tumultuous

But while it is clear there is significant disruption to come, Barker acknowledges that insurers have already endured what he describes as a ‘tumultuous’ time.

He said, “Brexit has had a big impact on our market. We know we have labour shortages in the household supply chain caused in part by the return of European workers to their countries of origin. We also know that importing materials is more difficult now than it ever was, and HGV shortages are well known too.

“We’re also experiencing very serious inflation where raw materials are concerned, and even hyperinflation in some basic materials.

“Then we’ve got the Covid pandemic, which proved just how inter-connected the global supply chain is. When a port in China closed we felt the effects here – we’re still feeling the effects.

“So the challenges we face today are more difficult than any we’ve faced since the recession of the credit crunch, and maybe even before that. The fact that they’re all happening at the same time is what makes it so difficult to deal with. But leaner, more efficient insurers who are more connected to their customers and supply chain through a digital chain will give us the best possible chance of making some money, and also doing the most important thing, which is putting our customers back to where they should be.”

ILC Home and Property Claims’ next live event will be the Environmental and Sustainability Specialist Conference taking place on 31 March 2022.