CC motor probe could prompt ‘wholesale changes’ - analyst

The Competition Commission’s probe into the UK personal motor insurance industry is likely to result in “wholesale changes”, says Shore Capital analyst Eamonn Flanagan.

Flanagan wrote in a research note: “The announcement of a Competition Commission investigation into the UK personal motor insurance market puts a question mark over the sustainability of the business model for many, especially those reliant on income from ancillary products.”

He added: “The use of the word ‘dysfunctional’ by the [Office of Fair Trading] to describe the UK personal motor insurance industry suggests that the latter is unlikely to emerge from the investigation without the imposition of wholesale changes.”

The Competition Commission probe was one of three challenges Flanagan highlighted for the UK listed insurance companies. The others were catastrophes and capital.

Flanagan pointed out that 2012 is likely to rank as the third-worst year for natural catastrophes despite it being a milder year than 2011. Current estimates put insured catastrophe losses at more than $60bn. The trend also continued for so-called cold-spot catastrophes – those occurring at times, locations or in business lines not deemed to be peak risks.

Flanagan said: “How the insurance industry deals with such potential exposures in the future is a key issue for shareholders in our view.”

On the capital front, Flanagan noted that low investment yields had boosted unrealised gains on insurers’ balance sheets. The resulting financial strength has kept a lid on price rises, except in loss-affected lines. This in turn has helped depress growth.

Against this background, Sore Capital has selected Amlin, Beazley, Hiscox, Lancashire and RSA as its ‘core buys’.

It has Catlin and Novae on ‘hold’ and rates Admiral and Direct Line Group as ‘sell.