UK: Insurance Market Update - Non-Life Insurers, January 2009

Welcome to the January 2009 edition of the Insurance Market Update in which we focus upon issues in the general insurance industry. In this issue, as a follow up to the summary of our motor market survey in an earlier edition, we focus on the state of the household insurance market.

Catherine Barton, Richard Lywood and James Rakow draw on information from our survey on the household insurance market and examine how 2008 fared in the aftermath of the huge flood losses in 2007 and ask whether 2009 will be the start of a strong run or whether it is just the calm before the storm as economic uncertainty presents challenging times ahead for insurers. For further information on the Deloitte Quarterly Household Report, please contact James Rakow. Your comments and suggestions for future themes or topics are, as always, welcome.

Kevin Elliott
Editor

UK Home Insurance – A Wakeup Call For Industry

The huge flood losses in 2007 reversed the run of profitability and stability seen in the household insurance market over the previous few years, but how has 2008 fared in the aftermath? And how will the market react to the impending recession in the UK?

After The Deluge

The insurance industry needed a year of recovery following the floods of 2007, a year in which the net operating ratio shattered the calm run of between 93% and 101% since 2003 with a jump to 120% as a result of claims from the summer flooding. This was driven by a leap in the claims ratio from 53% to 78%, while the expense ratio rose only slightly from 40% to 42%, due in part to increased claims handling costs (note: these ratios are based on data from FSA returns).

Wise After The Event?

What lessons have been learned? It is clear that the risk of widespread flooding and other weather events is a reality that both the insurance sector and government need to act upon.

In 2008, the 'statement of principles' originally agreed by the government and ABI, which was due to end in 2009, was extended until 2013. The agreement means that insurers will continue to offer flood cover to the 517,000 existing homes in high flood risk areas, provided that the Environment Agency ensures that adequate defences are planned and installed within the next five years.

Additionally, the ABI has called for this spending to be brought forward as increased public spending could assist in stimulating the economy. The ABI reports that there has also been overwhelming support for a recognised standard or kitemark to show that new homes are built to flood resistant standards, allowing homeowners to make a more informed decision when buying a house, and the analysis of flood risk far less expensive for insurers.

When implemented, these measures could have a great impact on the household insurance market. Many climate change indicators suggest that flooding is set to increase in the UK, and defences and regulation will make the risk much easier for both insurers and homeowners to deal with.

According to the ABI, customer satisfaction with the response of insurance companies following the 2007 floods was good, with ratings above those of the government and the Environment Agency. Measures taken included finding temporary accommodation, fitting kitchens on upper floors for customers who did not want to leave their flooded homes, and one company even purchased over 400 caravans to be used as temporary accommodation.

2008 – A Return To Normality?

While 2008 saw some significant weather events, losses have returned to more usual levels. This sets the stage for a return to profitability in the market and Deloitte forecasts the net operating ratio in 2008 to be 99%. Since the household market is catastrophe-driven, we believe that a market level operating ratio of around 95% in years with catastrophe-free claim levels may enable insurers to remain profitable overall once years of extreme weather events are taken into account. So this forecast does not represent a perfect return to health for the market, but is undoubtedly a step in the right direction.

While nothing happened to match the losses of the floods in 2007, there were significant weather events in 2008, most noticeably windstorms Johanna and Kirsten, arriving a day apart, which drove losses of around £150 million in the first quarter. There were also a number of near misses, including windstorm Emma, which caused an estimated €750 million – €1300 million of losses across Europe, mostly in Germany and Austria.

February also saw the largest earthquake in the UK for 25 years, as Lincolnshire was hit by an earthquake of magnitude 5.2, causing £10 million – £15 million damage. A British Geological Survey estimated that this scale of seismic activity only occurs around once every 20 years.

The floods of 2007 and these near misses in 2008 demonstrate how susceptible the industry is to large weather related losses. As shown in figure 1, operating ratios have hit peaks of up to 125% in the past, and in the absence of catastrophe, under-pricing can produce a loss-making series of underwriting results, for example as seen between 1997 and 2002.

Figure 1. Motor And Property Performance In Recessions

Maintaining Profitability

As shown in figure 2, premium rates were on a downward trend prior to the floods of 2007, which promptly halted in August 2007 when the effect of the floods became apparent and insurers saw the need to increase rates.

These premium rate indices are published in the Deloitte Quarterly Household Report (note that these reflect new business rates only). Our index measures the average 'most competitive' premium for a basket of risks. This means that while it only takes one or two insurers offering low prices to move the index down, a concerted effort from a number of players is required to move the index up.

In mid 2008, premium rates increased sharply. This was most likely a reaction to the worsening economic climate, and the forecast of tough times ahead for the insurance industry. But with little premium inflation since August 2008, one has to ask – are insurers raising premiums enough to prevent another underwriting loss?

Figure 2. Deloitte Quarterly Household Report – Premiums Rate Inflation Index

2009 – Wise Before The Event?

It is easy to look back and be wise after the event, but is the market wise to events in the immediate future? The impending recession and current economic climate bring with them a number of knock-on effects that could affect profitability and insurers must remain on their toes to avoid being caught out.

The channel shift to internet-based aggregators may accelerate as consumers become more price-aware. This will result in a more competitive market, as insurers seek to maintain market share. However, they will need to take care that they are not punished by the 'winner's curse' of providing the lowest quote, and consequently selling a large quantity of policies at a trading loss for the insurer. The increased presence of aggregators will also act as a dampener on premium levels which would otherwise rise quickly.

Past data suggests a strong correlation between instances of fire claims in commercial property and so-called moral hazard claims. As the economy deteriorates into 2009 we may see an increase in fraud and exaggerated claims, the prevention of which may drive expense ratios back up following their gradual decline over recent years.

A study undertaken by the ABI has revealed that those with a household income of less than £10,000 are 2.6 times more likely to have committed insurance fraud than average, and that home contents policies are by far the most likely to have fraudulent claims made on them.

Past recessions have coincided with a worsening in the operating ratio of the market, though the effects of severe weather losses make this a difficult relationship to quantify.

However, a recession is not all bad news. Insurers may benefit from an expected fall in the costs of repairing damaged properties, due to the decline of the construction industry. Historically, recessions have not led to a fall in spending on household insurance. Rather, the proportion of households who chose to buy contents insurance actually increased during previous recessions, suggesting that insurance is valued more in times of economic uncertainty.

Another feature of the current economic environment is the unprecedented low interest rate. Previous recessions have been coupled with higher rates (in excess of 10%), allowing insurers to bolster poor underwriting results with good investment returns. These high investment returns will not be available to insurers as we head into 2009 with the base rate the lowest it has ever been, giving even greater reason for caution when setting premium levels. This will be felt even more by motor insurers due to the longer tail nature of liability claims.

While the floods of summer 2007 halted the decline in premium rates, the worsening of economic conditions towards the end of 2008 has seen premium rates rise again as insurers act to guard against recessionary effects and the fall in interest rates. We believe that in spite of the increased competitiveness in the market, net earned premium inflation will continue to rise: to 4.4% in 2008 and 4.9% in 2009 in a "business as usual" market.

Besides recessionary effects, future profitability remains as ever at the mercy of large weather losses. Already this winter, insurers have seen an increase in claims relating to burst water pipes, caused by the extremely cold conditions at the beginning of the year.

Conclusion

2008 saw a return to profitability thanks to a mild year of claims following the huge losses of 2007. While the response of the industry to the floods has been highly rated by customers, insurers must remain poised and cautious as we head into the uncertainty of recession.

Our forecast of a return to profitability for the upcoming financial year has been based on a "business as usual" scenario, not taking the effects of the recession into account. The recession adds an increased element of unpredictability to the market, which will increase the overall uncertainty of these forecasts.

Whilst premiums have been increasing it is not clear how long this will last. If the market is to remain profitable, we must see continued growth in premium rates in order for insurers to avoid a run of poor net underwriting results.

Following a year of recovery, we look ahead and wonder if it will turn out to be the beginning of a strong run, or if we have just enjoyed the calm before the storm as economic uncertainty presents challenging times ahead for the household insurance market.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions