Competition seen as threat to profitability after 2007 flooding losses

The UK household insurance market may not return to profit in 2008 after the catastrophic losses of 2007 if aggressive price competition does not lessen.

Professional services firm Deloitte said the household market would produce an overall loss in 2007 – with a net operating ratio of 114% – following the £3bn insured losses of this summer’s floods.

It predicted, in its annual survey of the household insurance sector, that the market would return to profitability in 2008 on the back of strong premium growth, with a forecast net operating ratio of 98%.

But Deloitte warned that the market’s return to profitability could be hampered by price competition.

“The return to profitability based on strong premium growth may not materialise if competition does not lessen,” said Alex Panayi of Deloitte.

Rates in household insurance have increased very little in the last three years, owing to competition, with rates for building cover barely rising above their 1994 level, according to the AA’s British Insurance Premium Index.

Rates for contents insurance have risen faster than buildings cover, but have risen by less than 10% since 1994.

The summer floods prompted rates in both the buildings and contents markets to rise. The AA reported that in the third quarter of 2007 buildings insurance leapt by 3% – the largest single increase since 1994.

Meanwhile, contents premiums also rose by more than 2% during the quarter.

At the time the AA predicted that household rates would continue to rise, although competitive pressures would limit the extent of rate increases.