Hit to insurers from UK pricing reforms should be temporary – Admiral

Upcoming U.K. insurance pricing reforms could lead to "an erosion in margin," but it "should be temporary," according to Admiral Group PLC's U.K. insurance CEO Cristina Nestares.

The U.K.'s Financial Conduct Authority proposed measures in 2020 to reform motor and home insurance pricing in the country, including a ban on insurers charging cheaper rates to new customers than those renewing their policies. The regulator is expected to publish the new rules in 2021, although it has yet to announce when they will go live. The changes are expected to eat into insurers' profit margins.

On a call to discuss the personal lines insurer's full-year 2020 earnings, Nestares told analysts that the profit hit from the reform could be temporary because "companies will adjust prices accordingly." She added that "we should be better equipped to take advantage of this reform" because Admiral customers are used to comparing prices every year and the company is "very strong" at claims handling and the pricing of business.

Nestares added, however, that it would take time before the market adapted to the changes "and we fully understand the dynamics in the market."

U.K. motor insurance makes up the bulk of Admiral's revenue and profit. The group's share of pretax profit grew 21% to £638.4 million in 2020 from £526.1 million in 2019. The company benefited, among other things, from lower claims frequency during coronavirus lockdowns and reserve releases. Nestares said Admiral expected claims frequency "to increase to more normal levels," raising the company's loss ratio. Admiral's group loss ratio was 54.4% in 2020, compared with 64.9% in 2019.

While noting that Admiral had cut prices more steeply than its competitors in the latter part of 2020, Nestares said the company had started increasing prices again to account for the expected increase in claims frequency. "We think the market will need to unwind some of the discounts that were given in the past 12 months as frequency continues increasing," she said.

Admiral also revealed that there had been a further delay in applying for its internal capital model to be used to set its regulatory capital requirements, and that it now plans to file the application in 2022 instead of 2021. Admiral's group CFO Geraint Jones told analysts that while there was "a bit of frustration" at the delay, the company is keen to get the application right rather than rush it.

He added that there were not "huge, major problems" with the model and that the regulator was not indicating any issues with the numbers it was producing, but rather the company was reviewing its design, particularly how it models large claims. "Reserve risk is our biggest risk, and large claims are an important part of that," Jones said.