Weather has had a big impact on household insurance recently, but pouring London rain didn't deter our clients pushing our annual Household Insurance Seminar to standing room only. I thought I'd summarise what we ran through.
A big part of the seminar is the presentation of our insurance team's analysis of the household insurance market in 2018.
Overall, profitability remains an issue for insurers selling household policies, to the extent that they had an underwriting loss of 103% thanks to bad weather. We expect claim inflation to fall during 2019 following the 'Beast from the East' increase, but we do predict claims to start to rise again in 2020.
The numbers behind household insurance in 2018
We saw a small increase in Gross Written Premiums in 2018. The 2018 deterioration was mainly driven by 'the Beast' and a dry summer, exacerbated by slow increases in premiums.
These weather events meant that the average loss ratio rose in 2018 to 59% from 51% in 2017. Some smaller insurers were hit harder, with their ratios hitting as much as 80%. Expense ratios on the other hand haven't really changed, with a 1% shift from 2017 to 2018.
Looking at the main costs when it came to claims against household insurance, escape of water, theft and fire remain the main costs, making up 55% of total costs.
We did see that 'the Beast' incurred a huge cost on insurers around pipes claims. Storm costs did remain relatively stable, making 5% of total costs - with the majority of those storm costs hitting in the first quarter of each year. Jumping from cool to hot, subsidence increased from 4% in 2017 to 6% in 2018, largely due to 2018 being a long and hot summer. Accidental damage claims have increased, but cost per claim has decreased. Flood made up 3% of costs in 2018, and although the number of claims have fallen, the cost per claim has increased.
Staying on water, escape of water remains the largest of all claims costs. It increased to 31% in 2017 but did drop to 27% in 2018. However, escape of water remains the largest cost. The majority of people who attended our seminar felt escape of water to have a high impact on them and society, but also said they don't believe consumers realise this.
A rising tide in escaping water
Escape of water (EoW) is becoming a major issue and for that reason, we were fortunate to have Catherine Bell, Magenta Insurance's Chairman come and speak about how her company are addressing it. She explained a staggering £1 billion of indemnity was spent on EoW in 2018, making up 27% of all claims spend in the UK. From an environmental perspective, Catherine pointed out that 3.3 billion litres of treated water leak in the UK every day - a 20% increase compared to 10 years ago. Catherine spoke of her frustration with the lack of solutions and how Magenta Insurance have therefore partnered with utility supplier Geo, who specialising in smart meters, to address the issue with their Waterlock sensor-based technology. It detects standing water, humidity and temperature, and connects to your phone. The system is smart enough to detect a leak issue and shut your water off - almost like a fuse box for your water. A clever example of technology helping reduce damage, disruption, stress, claims and environmental waste.
What's ahead for insurers?
We forecast net loss ratios for household insurers to improve in 2019, whilst expenses largely remaining flat. The 2018 net combined ratio was 103%. We expect to see this to improve to a small underwriting profit at 99% in 2019 but then return to a 104% in 2020 leading to an underwriting loss. This is largely due to claims inflation being larger than premium increase. This all means insurers need to think hard about what this means for their businesses, particularly with the ongoing pressure on pricing.
Price is in focus
Insurance pricing is increasingly in the focus of the Financial Conduct Authority (FCA), largely due to their market study into the pricing of home and motor insurance. You can read more detailed analysis in our blog from when they announced the study (Nov 2018) and our blog analysing the study's interim report (Oct 2019). To summarise it, their main concerns revolve around:
- Price paid by customers: The FCA believes as many as four million customers paid high prices for their home insurance in 2018.
- Lack of transparency around premiums charged: This includes increases in premiums at renewal.
- Discrimination against vulnerable customer segments: The FCA has found 1 in 3 customers who are paying high prices which could be considered vulnerable.
- Cross-selling practices.
Potential remedies being considered by the FCA include:
- to tackle high prices for customers who don’t switch / negotiate;
- to tackle practices that could discourage switching;
- to reward firms being transparent and clear; and,
- to leverage innovation.
The Authority have made it clear they won’t consider multi-year contracts or a single period in the year when customers can change their insurance.
What do insurers need to be doing now?
- Get back to the FCA (if your company wants to) about what they’ve proposed before mid-November.
- Consider impact of new data and technologies on your models and products.
- Continue to improve governance and controls around pricing practices, bringing the customer outcomes at the fore front when considering pricing decisions.
- Review transparency of pricing, vulnerable customers, and customer understanding of products and choices
We continue to see underlying profit being eroded and this means the question around future profitability comes to the fore, particularly so amid new pressures on pricing. What that means for customers remains to be seen.
To express an interest in attending our 2020 Household Insurance Seminar, please contact the team at UKFSNetwork@Deloitte.co.uk.
- Blog: The FCA takes aim at price discrimination in the general insurance market (October 2018)
- Blog: The FCA shakes up the insurance market with its GI pricing study (October 2019)
- Report: Solvency II: Continuity, change and divergence in a post-Brexit world
- Various reports and articles on insurance at Deloitte.co.uk/Insurance