UK insurance reform hits new customers with price rises

Leading insurers have said that a big overhaul in UK insurance pricing that came into force in January is having the impact predicted by the regulator, with those shopping around taking the hit of a reform designed to protect loyal customers.

The rules sought to eliminate unfair price hikes at the annual renewal, by ensuring existing customers pay the same amount as they would if they were a new sign-up.

Direct Line’s chief executive, Penny James, said on Tuesday that the impact of the changes was so far within the “guard rails” of what the insurer had anticipated, pushing prices up for new customers as insurers adjust for the loss of differential pricing.

In motor insurance, that meant mid-single digit percentage price increases for new customers. “You can’t see it in the market data yet, but the offset to that will be in the renewal book — most customers will have a renewal price that is benefiting from this change,” James told the Financial Times, as Direct Line released its full-year results.

In home insurance, new business price rises were reaching double digits, she added, while indications were that switching had reduced.

Admiral’s chief executive, Milena Mondini de Focatiis, said last week that the initial price moves were “in the range” of what it had expected. “Probably, it is going to take months or a year to understand [the impact on] competitiveness,” she added, speaking at the publication of the group’s full-year results.

It will be key to see how customer retention and distribution channels such as price comparison websites are affected over the longer term, Mondini de Focatiis said.

The pricing overhaul has come at a difficult time for motor insurers, as the frequency of claims returns to normal after the pandemic — another factor that is pushing prices higher from their lowest point in half a decade — while inflation and supply-chain issues are increasing payouts.

Admiral’s share price has fallen more than 15 per cent since its results, which revealed that claims inflation was accelerating and included guidance that 2022 group profits would not match up to the previous two years.

The effects of higher used car prices and repair costs are likely to be felt into 2022, Mondini de Focatiis said. “It is very difficult to say . . . when this will return to a more normal level of inflation.”

Direct Line’s shares were also dragged lower, and fell nearly 4 per cent on Tuesday.

For the insurer, rising damage costs meant inflation remained above target during 2021. For the year, the business produced £582mn of operating profit, up from £522mn in the previous year and beating analyst expectations for the second half.

James said Direct Line could mitigate some of the inflation pressure by using its repair network to reduce the time customers needed a replacement car, for example; and has a team set up to address supply-chain shortages at its sites. “We are not immune, but we do have mitigants,” she said.