2023 Predictions: Cost-of-living crisis will create resilience issues for insurers

The FCA is becoming increasingly concerned about the impact of the rising cost of living on consumers. Early analysis from the FCA’s 2022 Financial Lives Survey indicates that in May 2022,12.9 million (or 1 in 4) of all UK adults had low financial resilience , this was up from the 10.7 million reported in the 2020 survey. Over the coming months, insurers will face several financial and non-financial resilience issues as a result of this shocking decline in consumer financial resilience.

With the rising cost-of-living, consumers are increasingly looking for ways to reduce expenditure. It is only a matter of time before spending on insurance products comes into the firing line. Some products such as third-party motor cover or building insurance for mortgaged properties are compulsory, so it is likely consumers will start shopping around or switching to cheaper products. Other products such as pet, travel and even life insurance are non-compulsory and therefore more susceptible to cancellation.

Increased cancellation rates will impact insurers’ future revenues. In addition to this, insurers will continue to be hit by higher operating and claims costs. Operating and claims costs are rising due to inflation, higher energy costs and continued supply chain issues. Lower revenues and higher costs will negatively impact insurers’ financial resilience in 2022 and beyond. Some insurers, particularly those offering non-compulsory products and operating with low profit and slim capital margins, will experience capital adequacy challenges. In addition, cancellations are likely to push up premiums for remaining policyholders potentially resulting in products that no longer present fair value for customers under the FCA’s new Consumer Duty.

In the extreme, monoline insurers specialising in single non-compulsory types of insurance may well find their entire business model to be no longer viable. This may trigger increased merger and acquisition activity in the sector as stronger insurers, able to capitalise on economies of scale, look to acquire new revenue streams.

Motor insurers typically work on slender profit margins and mass migration to cheaper policies will hit future revenue streams hard. This sector is already suffering from claims inflation, supply chain issues for parts/repairs and the impact of the FCA’s price walking ban. WTW recently reported that the average cost of motor claims increased by 6.2% in 2021. 2021 was a year when the UK’s general inflation rate was just 2.1% and so the increase in 2022 is expected to be substantially higher now that inflation has rocketed to over 10%.

Home insurers should expect an upturn in claims as households cut back on repair and maintenance costs. Cost-cutting may also result in more unsafe vehicles on the road, leading to more accidents and higher claims ratios for motor insurers. In addition, claim costs are likely to rise due to increased fraud rates.

As the number of vulnerable customers and those in financial difficulty increases, insurers will experience pressure on their claims and customer support systems. The higher bar set by the FCA’s new Consumer Duty is likely to result in further stress in these areas. There is also likely to be an increase in complaints as customers who opt for cheaper policies with reduced coverage might challenge claim outcomes or complain that policies were mis-sold. A prolonged increase in the number of customers requiring enhanced support may create operational resilience issues for insurers that fail to allocate sufficient resources in these areas.

Image courtesy Getsafe

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