January 16, 2021 Paul De'Ath
2021 is set to be a busy year for the UK insurance industry with significant regulatory changes, Brexit and Covid-19 all providing threats and opportunities. With this in mind we highlight five big things to look out for in 2021.
One of the major regulatory changes set to take place this year is the move by the FCA to bring an end to price walking – FCA pricing fairness.
These are set to equalise pricing for new business and renewals, helping vulnerable customers but also likely driving up new business prices for all. The exact implementation date is not yet known but there should be more details from the FCA following the completion of the consultation period on 25 January.
This is a surprisingly interventionist move from the FCA that could fundamentally change how the Motor and Home insurance markets operate in the UK. The industry is still working out the technicalities of how to make the pricing models work whilst also tackling the strategic challenge of a paradigm shift in the mechanics of the market. Flexibility and speed of pricing will be key to success, along with an ultra-efficient business model.
After a number of delays, the new implementation date for the whiplash reforms is May 2021. The reforms, part of the Civil Liability Act 2018, were initially due to come in in April 2020, before being delayed to August 2020, April 2021 and now May 2021.
The full rules under which insurers and counterparties will be asked to operate (via an online portal) are yet to be published, leading some to question whether there could be a further delay. The whiplash reforms, when implemented, will increase the limit for motor personal injury claims to use the fast-track small claims court from £1,000 to £5,000, as well as introducing a fixed tariff of damages for whiplash injuries. Medical reports will also be required before any offers of settlement for whiplash damages can be made.
While the changes will be welcomed by the industry, the jury is still out over whether they will have the desired effect of reducing the cost of spurious whiplash claims. It may be that whiplash is simply replaced by something else as the ‘crash for cash’ injury of choice. This is a concern given that there will be an expectation from the government that motor insurance prices should reduce to reflect lower whiplash claims.
The effects of Covid on the workplace will be with us long after the pandemic but what will the new ‘normal’ actually look like?
From analysis conducted by Oxbow Partners during the first lockdown, we found that only a relatively small proportion of the population (7%) will see a complete life change in terms of the way they work post-Covid. The vast majority (80%) will see no change to their insurance risk profile pre- and post-Covid either because they are unable to work from home or they do not work at all (retired, unemployed, students, etc). The remaining 13% will most likely work more flexibly, working from home some of the time to spend less time on the commute.
The impact on individual insurers will depend on the makeup of their customer base. Insurers with a higher weighting of well-paid white-collar customers are more likely to have to adjust pricing and product design to suit the new desire for flexibility. Covid-19 will cast a long shadow and has certainly accelerated pre-existing trends such as the growing threat of cyber-attacks and changes to mobility. Much will depend on whether companies embrace the shift to remote working as a permanent move or something to be consigned to history along with lockdowns.
With the furlough scheme extended to the end of April and the effects of Brexit yet to take full effect, the threat of recession hangs in the air as we enter 2021. We have already seen retail giant Arcadia go into administration and failed attempts to save Debenhams put 12,000 people out of work last year. If this is an indicator of things to come, difficult times may lie ahead for the UK economy.
In terms of insurance, an economic downturn presents many challenges from a softening market and reduced new business to more difficult retention. One key area to watch is fraudulent claims. The correlation between recessions and claims fraud is well documented. According to the ABI, the 2008 recession saw a 17% increase in false claims and there is no reason to suppose this time would be any different. For insurers, extra vigilance during claims handling will be essential to guard against this and handlers will need to ensure their processes are sufficiently robust to catch fraudsters even with the shift online.
2021 follows 2020 as another year of uncertainty thanks to, amongst other things, Covid-19 and Brexit. Uncertainty breeds M&A activity as it creates differences in opinion and divergence in fortunes.
We have already seen continued consolidation in the Broker space in 2021 with Gallagher’s purchase of Bollington Wilson this week. In Price Comparison, GoCompare and Confused.com are both moving to new ownership. Primary insurers RSA, Hastings and the AA will also ultimately be under new management in 2021. There are likely to be more transactions to come.
For those not yet embroiled in M&A there are many factors to consider. Depending on your situation it could be a time to defend unwanted advances or look for expansion opportunities – the best form of defence is often attack. Even those waiting on the side-lines need to be aware of transactions elsewhere as new ownership often brings strategic review which could change the competitive dynamics for the whole industry.
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About the author
Paul De'Ath, Head of Market Intelligence
Paul leads Oxbow Partners Market Intelligence team. Prior to joining Oxbow Partners Paul spent nine years as an equity research analyst covering all aspects of insurance across the UK and Europe. He started his career as an accountant at EY and also spent some time in industry at Standard Life.
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