UK rates can't beat inflation — home and motor insurers could suffer deteriorating results in 2022

UK auto and homeowners’ carriers will suffer a deteriorating earnings outlook and a rise in combined ratios in 2022 as rates fail to keep pace with claims inflation amid the turbulence of a regulatory-mandated pricing reshuffle,  Fitch Ratings’ analyst Róisín O’Reilly Smyth told a webinar Thursday (January 27).

“We believe that in 2022 the inability of rates to keep pace with rising inflation will see many home and motor carriers report deteriorating results,” O’Reilly Smyth said. New pricing rules from UK regulators will likely offer an additional “dent to profitability.”

Inflation may be the highest hurdle to face, both in motor and home.

“We expect inflation pressures to remain in 2022,” she said of the outlook in motor insurance, citing rising used car prices and repair costs. Fitch presents average gross cost per claim now pushing £5400, up ca £800 from 2019 levels.

“In home, we also expect the average cost of claims to increase,” she said, with the caveat that a portion of the sum could be offset by a reverse frequency move as workers move out of home office to some hybrid format with their traditional workplace, she indicated.

But the premiums side of the equation in both motor and home has been considerably more depressed.

Motor insurance suffered “substantial discounts” in 2020 and 2021 to their lowest levels in five years. While Fitch sees an “inflection point” in the pricing story, “we do not think the level of increase will be sufficient to meet rising claims inflation,” O’Reilly Smyth said.

The view of recent pricing in home insurance has been more blurred, with an industry lobby claiming increases in 2021 but price comparison models showing continued policy deflation. Fitch believes that the divergence in the pricing view shows the last-minute attempts by the industry to grab new clients ahead of fair-value pricing rules implemented at the turn of the year.

The homeowners’ segment won’t take any particular pricing gain in 2022. “We expect flat overall in 2022 in home,” O’Reilly Smyth said. “This in spite of the pressure from cost inflation and frequency benefit as people return to office.”

Turbulence in the pricing picture comes as the UK’s supervisory authorities have cracked down on price-walking in motor and homeowner policies, a practice by which new clients are tempted with heavily discounted prices while longer-term loyal customers are pressed into steep price hikes.  From January 1, UK insurers must offer the same value to new and repeat customers of the same risk profile.

“We expect the new rules will reduce profitability in the short-term,” O’Reilly Smyth said. But Fitch does not expect “structurally lower” profitability as the industry will adjust new client pricing.  “It’s not viable to cut in one without raising in others.”

Homeowners will be more affected than motor, where price shopping is a bit more prevalent, she suggested.

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