The series of floods and freezes last year has sent the number and costs of household claims through the roof. Do insurers have any choice but to raise their rates? And if they do, will the clients accept this, or will it pave the way for smaller firms to move in?

The coldest winter in 30 years just cost insurers a further £650m, according to the ABI, hitting balance sheets already reeling from a string of extreme weather-related losses. And of the £255m that was paid out for property damage, £194m related to homes – 60,200 claims out of 66,600. So it’s perhaps not surprising that insurers are reacting by putting up prices for household insurance, raising policy excesses and, in some cases, pulling cover from the most vulnerable areas.

Brokers report rate increases of 5% across the board, with excesses for flood damage commonly rising to £250, from £50-£100. The sustained soft market appears to be at an end. But that’s not the only change. The forecast is for market turbulence, as larger firms reconsider their exposure and smaller rivals capitalise on their retreat. When the storm is over, the home insurance market could look like a very different place.

Leading the charge to higher rates is AXA, which bore the brunt of the £200m-plus claims arising from the Cockermouth floods in November. Managing director of personal lines intermediary Mike Keating says that premiums are no longer sustainable, given the string of floods and freezes that have hit the UK since summer 2007.

“They’re not necessarily catastrophic events, but on each of these occasions, there has been a very significant indemnity cost to insurers, ranging from £20m to £60m, or £70m, but below the reinsurance threshold. The result is that insurers’ balance sheets have had to absorb these mini events, and clearly household rates haven’t increased sufficiently. They need to go up to cover not the one-in-200-year events, but the one, two or three events per year. Against that backdrop, household insurance has been very competitive over the last three or four years.”

From January, AXA has been pushing monthly increases that Keating says range from single to double digits, concentrated in areas of greatest exposure – certain postcodes, the over 50s (who may be more likely to be away from home during the coldest times of the year), and buy-to-let and second-home policies.

“We have not looked to do a one-size-fits-all rating increase,” Keating says. “We’ve done a complete DNA analysis of our portfolio and looked at all our claims data, not just in 2009 but in previous years too.”

The excess on escape-of-water claims has also risen from £100 to £250 across the board, though brokers can negotiate a rate rise instead.

Balancing act

Keating says it is too early to tell how the price increases have affected AXA’s renewal rates. “We’ve had no real hard push back from any of our broker partners. They’ve been very supportive,” he says. “At this moment in time, I’m as confident as I can be that what we are applying is going through. Household products are core to AXA, and we’re not looking to change that.”

At broker Towergate Risk Solutions, commercial and personal lines director Paul Szirbik backs this up: “Our commitment is obviously to our clients, but it’s also to ensure that insurers are making good loss ratios on their book of business with us. We don’t want a situation where we’re quoting very low premiums and it’s not sustainable, and we end up having huge increases from year to year. It’s a very fine balancing act.”

Szirbik’s colleague, personal lines sales manager Montrose Bill says his team is having to work harder to explain rises to clients. “We tend to liaise with clients before the renewal goes out in the post and give them the full picture; explain why the cost has gone up. It’s something we do anyway but, with the rate increase, we’re doing it a lot more often.”

Insurers are examining postcodes more carefully, and also individuals’ claims history. "A few postcodes you come across, insurers may not want to offer quotes straightaway – they may ask us for a flood survey before they provide cover. In most cases, we’ve managed to get cover in the end.”

At Swinton, group claims manager Steve Chelton has also experienced difficulties placing business in more vulnerable areas or where there has been a claim in the last 12 months, but he says the breadth of its panel means that no customer has been left without cover so far.

As a result, Chelton has witnessed significant churn in the market. “There are some that are losing a bit of our share of business. When you sit down and look at the numbers, you can see the shift from some insurers to others.” Those insurers that have raised rates or withdrawn from postcode areas are suffering, while mid-sized firms or relatively new entrants to the market are picking up the business.

“It’s a strange market; I don’t think we’ve seen anything like this for some years,” he says. “Some insurers are taking action now, but at the opposite end of the scale, some are sitting back and waiting. The household market has been very stable for as long as I can remember, and insurers were looking for volume. But over the last six or seven months, we’ve seen them paying more attention to specific areas, such as rating.”

Chelton’s prediction is that some insurers will withdraw altogether, providing an opportunity for smaller firms to grow. “There is good money to be made in household insurance, but you’ve got to know where you’re at and how to approach it.”

Other insurers are more reticent on rate rises. RSA declined to comment, though in his February results announcement chief executive Andy Haste said that adverse weather internationally had dented its performance in 2009 and that it had implemented a 3% increase for household renewals and a double-digit rise in personal lines new business.

‘Weather happens’

RBS Insurance also counted the cost of weather-related losses in its 2009 results, blaming them in part for a 90% drop in profits in 2009. But Direct Line home insurance business manager Andrew Morrell says there have been no price rises relating to weather events so far, though it constantly reviews policies and rates.

“We will always keep in line with inflation and make sure we’re in line with the market. We take a long-term view of pricing and claims to make sure they’re sustainable and preserve the strength of our business without losing our competitiveness. In terms of policy wording, we haven’t made any changes due to weather-related events and there are no immediate plans to do so. Weather happens, and that’s why we’re here.”

Morrell prefers to focus on the ways the insurer deals with weather events when they do happen. “We’ve developing new ways to get in touch with customers and manage claims in a better way for them. We’ve been contacting customers via text messages and emails to remind them to leave the heating on over winter, and making people aware when we get higher call volumes coming through. When we have a big event, we’re trying to get to people faster and we are stationing people in areas where there have been events, using the wider RBS network to support us.”

During the Cumbria floods, RBSI staff were based in Natwest branches in Cockermouth. “It’s visibility as much as anything else, so customers knew we were there,” Morrell says.

But being on the scene also means that RBSI can take control of claims earlier, and potentially reduce costs. “These things don’t happen often for customers, and a lot of the time they don’t know what to do, so we were able to help them make claims. We could both minimise the impact of what was happening and take a very early view of the best way of managing that claim, rather than leaving it a couple of days.”

A clearer picture

Aviva won’t discuss rates either, but it is keen to discuss its investment in a sophisticated surface-water flood map that will enable it to predict with much greater accuracy where floods will occur. The flooding in Hull in summer 2007 was caused by poor drainage of surface water after heavy rain, for example, as were the Cockermouth floods.

Aviva’s head of flood mapping, Simon Black, says that it is a significant advance from the river and coastal flooding map it launched in 2004. His team worked with hydrologists, using laser technology to create a detailed model of 125 urban areas around the UK, detecting undulations as small as 15cm. Then it was ‘flooded’ with a one-in-200-year rainstorm to show where water falls and pools, and cross-referenced with claims data.

“Advances in flood modelling have progressed fairly rapidly over the past five or six years,” he explains. “People have always been at risk because of surface water. This model means we’re better able to predict the areas at risk. If you look at climate reports, by and large they all agree that we’re going to get more frequent and heavier downpours.”

Black says the new map will allow the insurer to quote on single properties rather than postcodes, allowing it to distinguish houses at the higher end of a street from those at the more vulnerable lower end, for example. He will not say when the new map will be implemented for underwriting purposes, and is at pains to stress that it will be used only to offer better prices to safer properties.

“Where we find people at a higher risk, prices will not necessarily go up. Surface water is a relatively small part of a premium, so if crime figures come down, for instance, their overall premium might be lower.” The map will also allow Aviva to prepare itself and its customers for the impact of extreme weather events, ensuring there are higher numbers of claims staff in the right places.

For brokers breaking the bad news of higher quotes and scarcer cover to customers, the increasingly volatile climate – and insurers’ varying reactions to it – will certainly make for interesting times over the coming months. Saying how the market will look this time next year could prove as difficult as predicting the weather. IT