Insurance Times explores market movements in home insurance following the FCA’s pricing reform and escalating claims inflation pressures

The fall in home insurance premiums is a welcome relief for hard-pressed householders, but for insurers, it spells trouble.

According to figures published by the ABI in May 2022, building and contents insurance premiums are at their lowest level since the trade association started collecting data a decade ago. It reported that for 2022’s first quarter, premiums in these lines of business fell by 7% compared to the same period in 2021.

Despite this drop, insurers desperately need rates to rise, to help alleviate the crushing pressure of claims inflation. Analysis from consultancy EY, published in November 2021, predicted that UK home insurers would achieve a home insurance underwriting loss of 101.6% net combined ratio for 2022.

Insurance bosses are aware of these issues, however, and are working on solutions.

Jon Santer, broker managing director, personal lines at Aviva, said there is the twin pressure of claims inflation and customers’ changing behaviour impacting the home insurance market.

Helping to feed claims inflation are continued supply chain disruptions, arising from both Brexit and the Covid-19 pandemic, while building material costs are also on track to increase by 15% in the first half of this year, he said.

And let’s not forget the climate change driven uptick in medium-sized weather events battering homes and businesses in the UK, such as Storm Eunice in February 2022.

As a result of this environment, Santer believes insurance customers may start shopping around more, reducing their cover or even cancelling insurance policies to save money.

Insurers, however, can play a role in combating this myriad of pressures.

Santer explained: “Insurers can help to reduce the number of claims through awareness programmes to educate customers about some of the risks they are now facing, particularly around home maintenance, or advice on checking cover to make sure they still have the right cover in place for their needs.

“Insurers should also closely examine their claims supply chain and manage it proactively, paying close attention to the changing nature of claims experienced and also ensuring effective contractual measures are in place to manage supply and price volatility.

“Providing greater flexibility in their claims service should also help - for example, through [the] provision of cash settlement options, which will often lead to better customer outcomes.

“Fundamentally, insurers need to keep at the cutting edge of pricing and underwriting techniques to ensure they are making the most effective use of data and underwriting insight, to understand how claims patterns and costs are changing.”

Price walking ban impact

Typically, insurers would offset claims costing pressures by increasing rates. However, the FCA’s general insurance pricing practice regulations have caused significant disruption to this tactic.

The FCA’s new rules, which came fully into force in January 2022, banned price walking.

Price walking is the practice of slapping existing customers with premium hikes on renewal - even if the risk had not changed. New customers, meanwhile, would be offered an enticing discount on their premium, even if their risk was the same as current customers paying a higher premium.

The latest data from research firm Consumer Intelligence showed that the home insurance market, now unable to ramp up renewals, is aggressively raising new business prices.

Its figures found that new business premiums increased by 6.7% in the 12 months to April 2022.

Specifically, a major surge in new business pricing happened in January 2022, when the FCA’s price walking ban came into force.

Consumer Intelligence insights manager Mike Miskelly thinks the home insurance market is split between long-established insurers protecting their market share by reducing renewals and other newer players that are building their books by luring in new customers with competitive deals.

He said: “You’ve got the incumbents trying to protect their market share by reducing renewal premiums [to] retain customers.

“But that step change in upward adjustment in new business prices has created room for some market players, the ones [that] drove deflation in 2021.

“They [entered] 2022 in a really strong position. They are very competitive in the new business market and that’s almost keeping a lid on new business inflation.

“So, [while] we have the underlying inflationary pressures, such as [the] cost of wood, labour, we have some new entrants that can compete quite strongly on price because they don’t have the challenge of having to redress the balance between new business and renewals.

“What’s really interesting and what cranks up the level of friction a little bit more is that we’ve got some entirely new entrants to the market that have interesting business models. They’re very digital first, [providing an] app-led service. And they’ve really been able to gain a competitive foothold in the market.

“As a result of [the FCA’s new pricing rules] and the upward adjustment in prices, they found room in the market to get competitive with new and interesting propositions.”

Miskelly noted Urban Jungle and Getsafe as examples of app-led and digitally friendly insurance firms arriving in the UK home insurance market.

“Yes, there are some consumers out there that want to pick up the phone and talk to an insurer, but there are lots of consumers out there that want to do everything digitally with an app,” Miskelly continued.

“These entrants have come into the market and they are incredibly price competitive.”

Miskelly added that these “digitally enabled” new market entrants have “quite lean business models” and are “not relying on legacy systems”.

He said: “They, in terms of new business pricing, in isolation, are driving the competitive end of the market down at the moment. And that’s very interesting.”

Profitability ramifications

The aforementioned EY analysis noted that the overall impact of the FCA’s pricing reform will mean relatively flat home insurance premiums this year.

The firm forecast that the UK company home insurance market will slip marginally into an underwriting loss for 2022.

Players with scale, such as Direct Line, have other tools available to combat claims inflation pinch points, however - such as using their own supply network.

A spokesperson for Direct Line said that for both home and motor insurance, the company is targeting a combined operating ratio between 93% and 95% for 2022.

However, for market participants lacking that scale, there are challenging times ahead.

Insurance DataLab co-founder Matt Scott believes “undoubtedly” that current market conditions for home insurance will hit insurers’ profitability.

Technology will be the key in navigating through this difficult period.

He said: “To combat these pressures, insurers will have to look to technology [and] self-improving efficiencies - whether that be on the underwriting side, through things like embedded insurance, which can help drive down acquisition costs, or [on] the technology and the claims processing side as well.

“Using technology to automate processes [and] make things less costly will be very important.”