14 June 2016

Fitch: UK law change may squeeze commercial insurance margins

Changes to UK legislation intended to make it harder for insurers to dispute commercial insurance claims could lead to more intense price competition and slimmer margins for the sector.

The Insurance Act, which is due to take effect in August, will make it harder for an insurer to refuse a commercial insurance claim due to insufficient disclosure. It will also prevent firms from refusing to pay if a business customer breached a requirement of the policy that was entirely unrelated to the claim, such as if the customer failed to install required fire alarms, but then claimed for a loss from flooding. Separately the Enterprise Act, which will come into effect next year, will give customers the right to sue for damages caused by a late payment of their insurance claim.

Together, Fitch expects the new laws to result in fewer disputes over commercial insurance claims and an increase in the number of claims paid. When claims are disputed, insurers may also attempt to deal with them quicker to reduce the risk of being held liable for damages. Overall claims costs will therefore rise and insurers will increase premiums to compensate.

However, these developments will also reduce the variation in the industry in the speed and perceived fairness of settlements, which are two of the key factors customers cite when assessing quality of service. With less ability to differentiate on service, price competition is likely to increase, meaning firms are unlikely to be able to increase premiums enough to fully offset the higher costs. Higher overall premiums are also likely to make some customers such as small and medium enterprises even more price-sensitive, adding to the effect.

One positive impact for insurers is that the Insurance Act should reduce the prevalence of "data-dumping," where a customer discloses large amounts of information without attempting to determine whether it was relevant. Less data-dumping could reduce costs for the insurer if they no longer need to wade through disclosure to identify the pertinent risks. However, this would not be enough to offset weaker underwriting margins.

Press release

© Fitch, Inc.