While the disastrous floods of summer 2007 were obviously devastating for all those whose homes were destroyed or damaged, they were also a disaster for household insurers.
According to a new report by independent market analyst Datamonitor, household insurers suffered an estimated loss of over 300 million in 2007 due to the severe flooding experienced in the summer. However, the market is forecast to return to a profitable state in 2008.
The household insurance market incurred losses in excess of 300 million in 2007 according to estimates made by Datamonitor. The June and July floods are estimated to have cost insurers around 3 billion and when added to the other claims made throughout the year for theft, fire and subsidence, Datamonitor estimates that gross household insurance claims costs were in excess of 4billion.
While a proportion of this cost will be passed to the reinsurance industry, the bill for primary insurers will be enough to drag the market from a profit of 167 million in 2006 to a loss of over 300 million in 2007. “The summer floods of 2007 will hit UK insurers hard, leaving them with an estimated loss of over 300m on their combined household accounts,” says Mahreen Hussein, Datamonitor financial services analyst.
However, Datamonitor forecasts that the household insurance market will return to profitability in 2008 much to the relief of many insurers. Despite the market making significant losses in 2007, premium rates increased only marginally over the entire year and Datamonitor is anticipating stronger rate rises in 2008 under its neutral scenario. Assuming that claims costs return to normal in 2008, Datamonitor predicts an overall profit for the market.
“While the market suffered heavy losses in 2007 premium income actually held up pretty well, and as long as premium rates don’t decline in 2008 we are forecasting a return to profit for the household insurance market,” says Hussein.
The number of consumers purchasing their household insurance online has increased steadily in recent years. The use of price comparison sites and aggregators such as confused.com and moneysupermarket.com has also grown, bringing greater price transparency in the market. Household insurance is therefore in danger of becoming a commoditized product such as private motor insurance, with little to distinguish between products other than cost. Changing consumer purchasing trends have therefore placed a greater emphasis on price and less emphasis on service or brand loyalty.
“As more consumers use the internet to purchase their insurance, and with these online consumers more likely to switch their household insurance exclusively on the basis of price, insurers may fall into a trap of continuing to compete aggressively in 2008 in a bid to retain their market share. These sustained competitive elements in the market may therefore hinder the ability of insurers to bring in very strong rate increases, leading to only smaller levels of profit for 2008,” adds Hussein.