Building up to a price war

The AA's latest British Insurance Premium Index survey suggests that a price war is looming. The survey shows that home insurance premiums are reaching a plateau. The average quarterly increase for contents insurance is 0.59%. And the increase for buildings insurance is only 0.48%. Average premiums being are £139.99 for buildings insurance and £112.73 for contents.

The slowdown in rate increase is one indicator, but the spread of prices available is another. The lowest of three sample quotes for buildings insurance was £95.43 and the lowest of three for contents is £74.45. Both around 30% lower than the average.

AA Insurance Services managing director Andrew Briscoe says: "Following a four year period of near relentless premium increase, companies have started to return to profitability. This recovery, in turn, has resulted in the stabilisation of insurance premiums.

"The stable market is now attracting new entrants into insurance, who are using price promises and loss leaders to obtain customers. While this is good news for consumers in the short-term, it could threaten long-term stability of the industry.

"If, as all the indicators show, a price war is imminent, inevitably some insurers will struggle to survive. The result will be another period of consolidation or even collapse of some underwriters," argues Briscoe.

The Research Department associate director Brian Brown says: "New players such as esure have come in and are attempting to make a name for themselves. They are trying to aggressively buy in new business, leading to the possibility of a price war."

Stiffer competition

Some say that a price war is already waging. Leicester-based broker Williams & Williams household scheme manager Dainah Molloy says: "The competition is getting stiffer and stiffer. People are shopping around more and more. There is already a price war given the level of competition from the likes of Tesco, Marks & Spencer and Saga. The market is becoming like the motor market."

Peter Making, private client manager with Halifax broker Wilby agrees. He says: "When it comes to new business cases, insurers like Zurich and Legal & General will tend to be helpful with premiums," he says. "And when it comes to renewals they will also be helpful."

Of course, insurers are quick to dismiss talk of a price war despite the evidence. Norwich Union market development manager, household, Jill Willis says: "It's not really something we've seen."

And Willis is adamant that aggressive price competition is not a strategy that Norwich Union would employ. "We price for each risk and therefore are not prepared to sacrifice sustainability for short-term gain.

"We have never tried to compete on price on any distribution mechanism. If we did reduce our premiums, we would ultimately be unable to sustain them due to claims costs - over time we would have to put premiums up. "There is a price for each risk and it is bad business to under price."

Cornhill household manager Steven Ward is also surprised by talk of a price war. "Companies are not making enough profit to lower prices," he says. "In fact some people would like to see increases."

Ward echoes the Norwich Union position on price competition: "We see no point in writing lots of business where we won't make a profit."

Affinity schemes

Zurich head of underwriting Dave Swan is also dismissive of a looming price war. "We haven't seen any downward pressure on prices," says Swan. "In fact we have plans to increase rates."

But despite these bullish words, insurance companies with direct and intermediated products are finding increased levels of competition from affinity schemes offering cheap premiums.

Insurance products provided by major high street retailers, banks and utility companies are on the increase, with companies such as Sainsbury, Tesco, Marks & Spencer, npower and Goldfish already in the market.

They have strong brand names and a big customer base; and their strong buying power means they can offer extremely competitive rates.

Brown comments: "This year has seen more affinity and non-insurer branded products. We think this is something that will happen more and more. The growth of these schemes is bad news for brokers and direct writers."

Marrs Insurance Brokers managing director Mark Coffer also expresses concern at the long-term impact of this form of distribution.

"Affinity deals will have a bigger impact than the direct market in the longer term. The retail market has a lot of money; they can keep offering very good deals, which the holding insurer cannot match.

"They can also afford to take a hit on claims while keeping prices low to grow business and cross-sell other products.

"In five years' time an awful lot of brokers and perhaps insurers could go out of business."

But Jill Willis is not impressed by the arguments of those who advocate doom and gloom.

"Affinity schemes are making a lot of noise but people are not moving. The market share of these deals has not increased. If they were to have any real impact it would have been seen now," she says.

"There will always be a segment of consumers who want advice, therefore the demise of the intermediary is unlikely. Brokers are also starting to improve their marketing skills - they are becoming more switched on."

Price sensitive

Solace can also be found in the fact that household insurance is also less price sensitive than some other types of insurance, such as motor.

"People are less likely to move insurer for a lower premium," argues Peter Making. "Household is much more individually rated."

But Steven Ward also questions whether affinity deals will be sustainable in the long run.

"To secure a place as an affinity partner is extremely competitive and rates will be cut to the bone. If you underwrite for Tesco or Sainsbury's you will be offering a finely balanced rate," says Ward.

"Affinity deals are dangerous. There is a dilemma between volume and profit: it is uncommon for the two to go hand in hand. Where an affinity partner can offer volume they will be well aware of the influence they can exact in terms of rates."

He also argues that a further danger posed by affinity deals is that by their very nature they may have an adverse effect on underwriting and account performance.

"Large affinity partners are looking for insurers to provide a quick, simple service. This may not allow enough underwriting information to be collected.

"And as the amount of data reduces, the risks start to average out, with the result that underwriters may not be able to differentiate between risks as much as they would like."