Insurers must change underwriting approach, according to research.
Insurers need to tailor their underwriting to combat both increased competition and regulatory scrutiny, research from Ernst & Young (EY) has revealed.
In its 2013 Item Club report, EY stated that general insurance premiums were up 2.5% in 2012, and forecast average growth of 3.7% during between 2013 and 2017.
However, it added that this was slower than the nominal GDP growth which was forecast to increase by 4.5% a year.
Furthermore according to EY “abundant capacity” has kept insurance prices fairly flat, with motor premiums lower than they were a year ago and household contents insurance prices have fallen by 6.5%.
Add-on warning
While add-ons to basic policies remain profitable, EY warned “this may not last” due to increased regulatory and customer scrutiny.
Similarly, dual pricing is under threat. The professional services firm said it expected insurers to reassess their pricing models so as to “balance regulatory conduct requirements with the need for profitable business”.
On a positive note, EY claimed that general insurers should benefit from resurgence in the housing market.
With property transactions expected to be 12% higher in 2013 than in 2012, and forecast to rise a further 8% next year, insurers will have opportunities to increase levels of buildings and contents insurance.
Pressure on business models
Mark Robertson, head of UK insurance at EY, commented: “News of the UK economic recovery is music to the ears of insurers, but it is barely relieving the pressure on many players’ business models.
“General insurance is a case in point. Recovery should give a lift to premiums, but the FCA’s thematic reviews (e.g. dual pricing and ancillary sales) represent a direct challenge to many firms’ current business models.”
Robertson said that many insurers and brokers would see an erosion of certain profit streams and therefore needed to focus harder on customer or risk specific value propositions.
He added: “At the same time, they need to simplify their operating models and become more transparent to customers in order to secure long-term profitability.”
