Generally, individuals and businesses buy insurance for one of three reasons. Often they simply have to, as with third-party motor insurance and employers' liability. Sometimes they fear that some disaster will create a damage or loss that they could not meet. For a homeowner, there is the fear of a fire destroying their house. A business may fear being sued.

The third reason people and companies buy a policy is to help them manage the unforeseen or irregular events. They expect they will have a claim at some time, such as for theft or weather damage.

In this last category, the expectation and treatment of claims can be important in determining how cover is viewed and how it might best be sold, and this is something that insurers often pay great attention to.

However, there is little analysis of claim trends, which is perhaps surprising, because claims determine how many people and businesses react to the industry.

There have been very significant changes in the past decade. If you add together domestic theft, fire, subsidence and weather claims, the amount the industry paid out rose from £4.3bn in the three years from 1992 to 1994 to £5.9bn in 1998 to 2000.

This is a somewhat worrying trend, but it does not reveal the true picture. If you look at a breakdown of the claims, you discover that in 1992 to 1994 domestic theft claims were £2.1bn, 49% of the total. In the next three years, the share fell to 35%. In the last three years it has fallen again to 28%.

Domestic fire has stayed fairly constant at around 15% and domestic subsidence has increased from 12% to 19%.

The big change that has occurred has been as a result of the weather. Claims for weather-related damage have grown from 24% of claims in 1992 to 1994 to 37% in the last three years.

Some years are worse than others for weather damage, and last year was a good example. However, the three-year averages smooth this out a little. From 1992 to 1994 domestic weather claims totalled £1bn. From 1995 to 1997 they increased by 20% and in the last three years they have totalled £2.2bn. Subsidence claims, as well, have doubled.

Equally significant changes have taken place in the commercial claims sector. The total paid out for commercial theft, fire, business interruption and weather claims has risen from £3bn in the 1992-to-1994 period to £3.8bn in 1998 to 2000.

However, commercial weather claims have increased from 11% of the total in 1992 to 1994 to 25% on average over the last three years. The percentage comparison would be even greater if business interruption following weather damage was included.

These statistics pose a number of interesting challenges for insurers, intermediaries and the industry. Will we see greater volatility in claim payments? Can underwriters identify and reward the better risks? Is it feasible to penalise the poor risks and charge realistic premiums? And does the industry need to take account of social responsibilities in making available and pricing some insurances?

The industry also needs to examine how much existing and future risks can be improved to reduce the vulnerability of weather-related damage. Furthermore, it should consider whether claim workloads will fluctuate more in future, as this will have implications for staffing levels and other employment issues.

Of course, no one has a crystal ball to foresee what the weather holds for the insurance industry during the coming decade. But insurers need to ask themselves if there are new weather related products and services that are likely to be needed or valued by individuals and companies.

Alternatively, are there areas of business where insurers would prefer to reduce exposure or where the insurance premium does not now reflect the risk making it?

  • Independent consultant Tony Baker, a former deputy director general of the Association of British Insurers, can be reached at .

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