A new U.K. law, designed to make it harder for insurers to dispute commercial insurance claims, could lead to more intense price competition and slimmer margins for the sector, according to Fitch Ratings.
The Insurance Act, due to take effect in August, will make it harder for an insurer to refuse a commercial insurance claim due to insufficient disclosure, the ratings agency explained in a Fitch Wire briefing.
“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,” Fitch added.
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 claims, the agency affirmed.
“Together, we expect the new laws to result in fewer disputes over commercial insurance claims and an increase in the number of claims paid,” Fitch said.
“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.”
Fitch noted that the variation from company to company in the “speed and perceived fairness of settlements” are two of the factors that customers use to assess the quality of their carrier’s service.
With less ability to differentiate on service, price competition is likely to increase. But insurers are unlikely to be able to increase premiums enough to fully offset the higher claims costs, which will squeeze margins, explained Graham Coutts, director, Insurance.
“Insurers can price in some of the extra costs, but they are unlikely to be able to include all the costs because of ongoing market competition,” Coutts said.
Further, higher overall premiums are also likely to make some customers such as small and medium enterprises shop around more for better deals, which will further exacerbate the price competition, he indicated.
“Commercial property insurance is likely to see a bigger impact than commercial motor policies, where underwriting margins are already slim and in line with domestic personal line policies,” said Fitch Wire. Quoting data from the Association of British Insurers, Fitch said the calendar-year combined ratio for commercial property policies was 90.1 percent in 2014 compared to 93.3 percent for domestic property.
The largest writers of U.K. commercial property insurance are multiline groups such as Zurich Insurance, Aviva and AXA, Fitch said. “These and other rated insurers are well placed to absorb the increased costs due to diversification by geography and business line. Smaller insurers with a heavy focus on commercial policies would be more exposed, but the scale of the potential impact is hard to gauge.”
Fitch noted that 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, Fitch explained.