As the hard market continues underwriters have been warned that regulation and the pandemic may drive renewed downward pressure on rates.
PwC issued its analysis of the UK market and predicted the cost of home and motor insurance may fall as changing regulation, plus the ongoing pandemic, could have an impact on the cost of general insurance, causing significant downward pressure on premium rates across both personal and commercial lines.
It said for personal motor insurance, the current lockdown in the UK will continue the trend of lower than expected crashes on the road. This is in light of the latest Government figures suggesting that road usage so far in 2021 has been approximately 50% of normal levels.
The resultant fall in claims levels will be exacerbated by reforms to reduce the number and cost of road traffic accident whiplash claims expected in May 2021. However, the average cost of vehicle repairs is likely to continue to increase by 7% – 10%, as car manufacturers increase the cost of car parts to make up for profits lost through the reduction in new car sales.
PwC added competition in the home insurance market continues to increase as many insurers look to grow in this segment. There was a reduction in some types of home claims during 2020 due to COVID-19, although not as great as in motor insurance. For example, theft claims reduced in 2020 as a lot more people were working from home. However, over the winter, due to the very cold weather, we have seen an increase in claims due to greater than expected burst pipes. The cost of materials for repairs – as with motor insurance – is increasing in home insurance.
Based on the increased competition between insurers to grow and the impact of the pandemic PwC estimated that this year motor insurance premiums will fall by 5% – 10% and home insurance premiums will fall by 4% – 8%, for those customers who shop around for cover.
New regulation from the Financial Conduct Authority (FCA) is expected to be introduced in late 2021 or early 2022. The new rules will require motor and home insurance prices to be the same for both new customers and those renewing. Traditionally, discounts on new business have been funded by increased pricing on renewal. As a result, under the new regulations, those that already shop around may see price increases, whilst those that have remained with an insurer for a number of years may see price drops.
For commercial lines, there will be a continuation of the rate increases seen in the second half of 2020 of between 5% – 20% depending on the line of business. The average costs of claims on commercial lines have been rising over a number of years without increases in premiums and 2020 and 2021 is a correction to equalise this.
Mohammad Khan, General Insurance Leader at PwC UK, explained: “For 2021, due to the economic impact of the pandemic and competition in the home and motor market, we are forecasting insurance premiums to drop by 5% – 10% for those who shop around for motor insurance and 4% – 8% for those who shop around for home insurance. Conversely, there may be greater reductions in renewal premiums for customers who have stayed with an insurer for a number of years. However, these estimates exclude the impact of the FCA reforms which may not be introduced in 2021.
“If the reforms on market pricing are introduced in 2021, the cost of the reduction in renewal premiums for customers who have stayed with an insurer for a number of years may be borne by those customers who use price comparison websites. This is because the renewal reduction will be funded by the abolition of discounts that are currently available to drivers who shop around each year.
“For example, some young drivers who try to take advantage of the discounts offered by taking out a new insurance policy, could see their premiums rise steeply by more than £200.”
“As we go deeper into 2021, the economic impact due to the pandemic, especially on smaller businesses, who may have been relying on furlough payments and government loans, will force SMEs to decide whether insurance is necessary,” he added. “This will then no doubt have a significant impact on commercial insurers targeting this sector and the price rises they are able to achieve. For example, commercial insurers targeting the very small end of the commercial lines market may only achieve price rises of 0% – 10% in the latter half of 2021.”