COMMENT: Insurance pressures | Citizens float

Martin Flanagan
Martin Flanagan
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THE clampdown on consumer costs in the private motor insurance market by the competition authority is welcome, but is nuanced and incremental rather than transformational. The most noteworthy change introduced by the Competition and Markets Authority (CMA) is to ban current contractual agreements between some comparison websites and insurers which block those insurers making their products available more cheaply at rival websites.

The CMA’s move is therefore as much about encouraging competition between comparison websites as anything else. Those websites could pull down the premiums drivers pay by lowering their commission rates to the insurers; but at the minute there’s no incentive to do so because insurers are not able to offer a cheaper online premium elsewhere.

The change cannot help but widen the choice for drivers shopping around for insurance, and is therefore welcome.

The CMA has also recommended the Financial Conduct Authority, Britain’s financial regulator, investigates to try to make insurers give more information to customers about products sold as add-ons to car insurance policies.

It is currently an unsatisfactorily nebulous area, particularly in the area of no-claims bonus protection products. Again, so far so good.

But the industry will be disappointed that the CMA – probably based on sound real-world arithmetic – could not find a way of capping the cost of a courtesy car for the innocent party after a traffic accident.

There is little incentive to keep the cost of a car down because while it is the insurer of the innocent driver which arranges for the car, it is the insurer of the guilty driver who pays for it.

The CMA says such an arrangement, although inefficient, only adds about £3 a year to motor premiums, so the game would not be worth the candle to try to alter it through significant legislation.

The industry will also be disappointed that whiplash claims – the bane of the UK motor insurance sector because of the high incidence of fraudulent behaviour – was not considered the province of the CMA probe.

Aviva chief executive Mark Wilson, an antipodean, remarked wryly at the insurer’s results teleconference that he did not believe the dizzying rates of whiplash claims in the UK – way higher than Europe – indicated that the Brits had congenitally weaker necks than their counterparts across the Channel. Brass necks, maybe.

One of the problems is that even though it affects most of us, general insurance can be a complex industry to get a handle on, with variables including everything from previous claims to geographical areas.

Even so, if another £20, £30 or £40 can be knocked off the price of a policy – particularly for cash-stretched younger drivers – the regulatory reference will not have been a failure.

Not such a solid Citizen, but still…

ROYAL Bank of Scotland should not be too disappointed at having to cut the price of shares being sold in the flotation of its Citizens Financial arm in America to $21.50 compared with its earlier targeted range of $23 to $25.

It is true that analysts are not overwhelmed by Rhode Island-based Citizens’ prospects for improving its revenues and key cost/income ratios etc.

But neither is the City arguing that it is a terrible decision to jettison the business, largely at the unsubtle behest of a government that wants part taxpayer-owned RBS to focus on lending to UK households and small businesses rather than stateside.

I think the pricing issue is as much to do with the overhang of lukewarm sentiment in the US to financial institutions generally following the 2008 crash than any business-specific issue to do with Citizens.

The banks and Wall Street are in better shape but the US investment community still has in its collective memory – aided by periodic regulatory fines on leading American banks – just how badly it can go wrong in the sector.

This is partly unfair to Citizens, which has always been a deeply conservative bank rather than one of the high-steppers that invited nemesis.

Even if it means RBS will raise less money for the taxpayer in the graduated float, the strategic decision to quit the business still looks fundamentally sound.

The offer raises about $3bn for the Scottish group, bolstering an already much strengthened balance sheet.