General Insurance Article - Moody's comments on CMA reforms for UK motor insurance

 Last Thursday, the British Competition and Market Authority (CMA) set out proposed reforms on the UK private motor insurance (PMI) market to increase competition and reduce the cost of premiums for motorists. The proposed measures, which include a cap on vehicle replacement costs and a ban on price parity agreements between price comparison websites (PCWs) and insurers, may reduce claims costs but are considered to be modestly credit negative for UK motor insurers on the whole, according to Moody's.

 The rating agency added that "In fact, overall the proposed reforms are likely to further increase price competition in the market and we expect the insurance industry to pass any associated benefits to policyholders through further rate reductions."

 Following the announcement on 12th June, the CMA will now consult on the following five proposed reform measures, before publishing their final decision in September.

 A cap on replacement vehicle charges is beneficial for the insurance industry as it will reduce associated claims costs. Moody's comments "However, given the competitive nature of the UK PMI market, which saw record premium reduction in 2013, we expect insurers to pass any benefits to policyholders through further rate reductions. Given that the extent to which claims costs will reduce remains uncertain at this stage, a reduction in premium rates would therefore increase pricing risk for insurers in the short term. We expect the potential rate reductions to be modest because the CMA estimated that vehicle replacement market inefficiencies cost consumers between £70 and £180m per year in premiums, therefore relatively small in the context of a £10bn gross written premium PMI market."