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How UK home insurance can return to profit post-pandemic

28 January 2022 · By Irene Martínez

There’s a lot of talk about UK property insurance being in a hard market cycle at present. Yet, given how low premiums have fallen, the increasing pressure of rising claims costs, and the impact of the FCA’s pricing practices regulation, the price rises being talked about may not be enough to return the industry to profitability post-pandemic. 

The latter is especially true given that this hard market cycle is supposed to have begun in 2018 yet has so far had little positive effect on combined operating ratios. If anything, the impact of the pandemic has been to lower premiums, especially in residential property insurance. At the very least, the pandemic exacerbated many of the longer-term pressures on the industry. 

The question is, how is the industry likely to develop into 2022 and beyond, and how can it look to return to profit?

Premiums are in the doldrums

Average UK home insurance premiums fell by 5.6% between September 2020 and September 2021, according to moneyexpert.com. This is a direct result of the pandemic and multiple lockdowns. With more people at home, burglaries fell by 30%. They were also better able to find and stop water leaks and burst pipes – traditionally the largest single source of home insurance claims. 

Post-pandemic, Consumer Intelligence predicts that premiums will begin to rise as more people return to work. However, this prediction also states that prices won’t return to pre-pandemic levels due to some people continuing to work from home longer term. This is a problem for the industry because premiums were already too low for many insurers to make a profit despite the hardening market before the pandemic. 

According to Statista, the overall average profit margins of UK home insurers collapsed from 12% in 2016 to 2% in 2018, when premiums began to rise to try and counter this trend. Most observers agree that premiums have been under-priced for years, failing to keep pace with rising claims costs in an increasingly commoditized market driven by the need to compete on price comparison websites. 

Claims costs are rising

A 2019 report from Travelers Insurance highlighted the long-standing rise in claims costs in UK home insurance pre-pandemic by saying that over the past 20 years, “claims costs for Property Owners Insurance have risen significantly, while rates have remained stable or even fallen”. The key question is: why have claims costs been rising so much?

One apparent cause appears to be increasingly severe weather events such as storms, high winds and flooding. These have led to high claims not only in winter but in summer too. According to the Association of British Insurers, the 2018 ‘Beast from the East’ storms led to insurers paying out £194m for burst pipes alone, while the summer heatwave that same year led to £64m in subsidence payouts. These extreme weather events show no sign of abating. 

At the same time, as extreme weather events have increased, modern construction methods have proven less effective at withstanding them. More lightweight construction materials – some of them incorporated to improve energy efficiency – are often more susceptible to water damage and fires. More modern buildings also tend to have more plumbing than traditional ones, leading to more potential points of failure for water damage claims. 

Indeed, up until the pandemic, water damage claims soared, representing 29% of all domestic UK home insurance claims in 2019, while the average cost of these claims rose by 31% between 2014 and 2017. 

The cost of making repairs has also spiralled. They increased by 13.5% between 2015 and 2019 due to the rising demand for building materials by India and China and rising wages for UK construction workers. According to the Office for National Statistics, the latter went up by 15% between 2014 and 2018.  

Regulation poses another challenge

On top of the increasing costs of settling claims, home insurers also have to cope with increasing regulatory pressures. One example of this is the FCA pricing practices regulation which comes into full effect in January 2022. Another is the mandatory TCFD reporting which will become UK law in April 2022 and will require insurers to disclose climate-related financial information in line with recommendations from the Task Force on Climate-Related Financial Disclosures

When it comes to raising premiums, because of the new FCA pricing rules, UK home insurers will now need to evidence that any price rises on legacy products are in line with rising costs, as well as offering fair value to consumers. Insurers will also need to prove that new home insurance products provide fair value. Without this evidence, the regulator will challenge them and possibly intervene. All of this will make it more challenging and time-consuming to raise premiums in any meaningful way – at least until insurers become comfortable with the new regime. 

When it comes to disclosing climate-related financial information, this adds an extra regulatory burden on insurers. It will also push them to understand the current sustainability impact of their claims function and wider supply chain, so they can report on this and work to align with their broader sustainability goals.  

How to make claims faster, more efficient and more sustainable

In the face of all this pressure, new technologies and InsurTechs threaten to disrupt the market. 2021 is already lining up to be a record year for total InsurTech investment, and this trend seems likely to continue into 2022 and well beyond. 

Yet the rise of new technologies and tech-based ventures offers UK home insurers an opportunity as much as a threat, mainly since so many InsurTechs exist to partner with and support incumbents to improve operations or streamline claims, improve customer service or tap into new, underserved customer segments, or simply to leverage new technologies more effectively.

Indeed, since claims are arguable in the area where home insurers currently feel the greatest pressure, this is where insurers could perhaps see the biggest impact. It is now possible to harness new technologies to make their claims processes faster and more intuitive for policyholders while saving on costs and becoming more sustainable. 

Artificial intelligence is already impacting multiple areas of our lives as consumers, from the Google search algorithm to digital personal assistants such as Siri and Alexa, to connected devices in the home. According to McKinsey, “AI and its related technologies will have a seismic impact on all aspects of the insurance industry, from distribution to underwriting and pricing to claims.” 

This is why Bdeo has put together a white paper to discuss these challenges in depth. Titled The UK home insurance market: Challenges and opportunities in 2022 and beyond, the paper analyses the significant challenges facing the UK home insurance sector before highlighting where the rise of AI and visual intelligence technology can help transform these challenges into opportunities for forward-thinking home insurers in the years ahead.

Download your copy of the white paper here

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