Household weathers the claims storms

The household insurance market has not been in the best of health in recent years. Datamonitor's new report finds that frequent and severe claims, and low premiums have seen the sector's underwriting result continue to nose-dive. However, the latest Financial Services Authority (FSA) returns reveal a sector that is trying to claw its way back to profitability.

The report estimates an average annual growth rate of 5.7% between 2001 and 2006, resulting in a market value of just over £7bn. This assumes that following a period of significant rate increases premium growth begins to slow.

Based on this scenario, driven by rate increases, the underwriting result is forecast to reach profitability in 2003. It will then flatten out, before starting to decline once more in 2006.

In 2000, the UK household market was worth £4.9bn in gross written premiums. This was an increase of 5.2% on the previous year, and the first growth in premium income since 1997. It is a sign of the commitment household insurers have made to combat spiralling claims costs following a number of unpredictable and disastrous weather events - in particular the storms and flooding experienced in the winter of 2000.

Datamonitor estimates that 2001 saw the annual growth rate increase almost 7%. This would make the household insurance market worth £5.3bn of premium income.

In spite of the growth in premium income the underwriting result for the year 2000 did not provide a strong platform for the industry to launch itself back into profitability. The underwriting loss increased by 106.7% to £432m in 2000. This knocked back the improvement demonstrated in 1999.

A key driver behind this poor underwriting result is continued claims inflation. Claims costs, in terms of gross claims incurred, have been increasing by an average of 3.8% year-on-year since 1996 and stood at almost £2bn in 2001.

However, gross claims incurred decreased in 2001 by 5.9%. This is perhaps unsurprising given the severe weather damage caused by storms and floods in the latter part of 2000. Yet 2001 still saw the second highest weather damage costs since 1990 at £761m. Weather claims have been increasing by an average of 7.7% year-on-year since 1996 - a worrying trend for household insurers.

While claims incurred increased, there was also a 3.8% decline in net written premium income - nearly triple the annual average between 1996 and 2000. A hardening reinsurance market and a greater need for insurers to cover themselves in the face of growing and unpredictable claims are key causes. During 2000, the amount of reinsurance ceded increased by 14.4% to £438m.

Key concern
Also in 2000 there was some jostling among the top ten household insurers. The merger of CGU and Norwich Union led to CGNU becoming the market leader by a substantial margin, with a market share of 26.7%. The second largest player in terms of gross earned premiums in 2000 was Royal & SunAlliance with 16.4 %.

Clearing the household book of unprofitable and non-core business is a strategy being employed by most of the big insurers. Underwriting for profitability is now the key concern - even at the expense of market share. As a result the total market share of the top ten players decreased in 2000 by 1.4 % to 77.5%, as the top five players, with the exception of Zurich, all recorded growth rates during 2000 that were below their average annual growth rates between 1996 and 2000.

The players that increased their share of the market in 2000 were Direct Line, Lloyds TSB and NFU & Avon. These companies all recorded premium income growth rates in 2000 significantly higher than their average annual growth rates over the 1996-2000 period.

Direct Line demonstrated the strongest growth rate of any top ten player with a growth rate of 36.9% in 2000 - more than double its average annual growth rate of 15.1% between 1996 and 2000.

Change ahead
However, 2002 will see a significant change among the top ten household insurers following Churchill's acquisition of Prudential's non-life business. In 2000, both companies were very prominent in the household market. Prudential was the fourth largest player, while Churchill held twelfth position.

In the context of the 2000 competitive structure, and on a pro forma basis, the acquisition puts Churchill straight into the top ten with a market share of 6.7%.

This has no impact on the order of the top ten household insurers. However, it does bring Churchill closer to Zurich and widens the gap between the top four insurers and the rest of the market.

The losses experienced in 2000 following the winter storms meant combined ratios worsened.

In the context of the total property insurance market, the average combined ratio for the top 20 household insurers increased from 95% in 1999 to 103.7% in 2000.

However, insurers with a high proportion of household business tended to record lower combined ratios than those with a greater exposure to commercial risks.

Of the nine insurers that demonstrated a better than average ratio, only two had a predominantly commercial focus.

Rate increases
The difference is emphasised through a comparison of average combined ratios. The average combined ratio for those top

20 insurers that conduct only household business was 96.9%, compared to 103.7% for the whole top 20 in the household market, and 111.9% for the total property market.

The household insurance market is forecast to continue growing into the near future and there are a number of factors that will drive this growth.

In terms of rate increases, there is a need and desire among household insurers to bring the market back into profitability. Several industry executives commented that this would mean double-figure increases. Furthermore, growing claims cost and poor investment returns will further fuel a need for rate hikes.

Will this be enough to bring the market back up to profitability?

This, of course, will depend on the unpredictable weather being kind for a change.