Household insurers need to reduce their costs and improve their branding if they are to return to profitability and reduce the threat from new players to the market.

Research from analyst Datamonitor found that flooding had made household – once a safe option for insurers – an unprofitable and controversial sector.

Insurers in the UK saw their claims costs rise by 16% during 2000, with the severe flooding being the key factor.

The household insurance market incurred claims of £3bn, the largest amount since 1990.

Average contents insurance premiums increased by 1.1% in 2000. But the year before, household insurance premium income fell by 3.4%, caused by a reduced take-up of policies.

The substantial increase in the cost of motor insurance is thought to have had an effect on the level of take-up, with some people opting only for motor insurance.

Datamonitor said the household sector continued to suffer from the heightened price competition among providers, and research suggested that the number of household policies had fallen, emphasising consumer sensitivity to rate increases.

The sector is not predicted to get back into underwriting profit until 2003, with Datamonitor thinking it unlikely that the sector will be able to match the level of motor rate increases. Insurers therefore need to look at their expenses to make a more dramatic change to their results and reduce costs by making use of technology, both in the direct and intermediary channels.

Insurers were also warned to look out for the rise of "brandassurers" – companies applying their brand, marketing and customer services expertise to supply policies underwritten by established insurance companies.