Home insurance premiums fall

Nia Williams

April 26, 2013

Typical quotes on the AA’s Shoparound index found that buildings insurance was down 2.6% over the quarter, contents was down 1.7% and a combined buildings and contents policy was down 1.8%.

Simon Douglas, director of AA Insurance, said that the downward trend will be hiding wide regional variations, particularly where homes have suffered floods.

Douglas said: “Flood-affected homes will have seen big premium increases especially if they have suffered two or three flood claims.

“They are also likely to have seen the excess rise sharply.”

Such homes can still obtain insurance according to a ‘statement of principles’ between insurers and the government. That comes to an end in June this year and there is no sign of a replacement.

The agreement was struck with the insurance industry in 2000 provided the government continued to increase investment in flood risk management.

In fact investment has fallen despite a recent welcome announcement that a further £294m will be spent to protect an additional 64,000 homes against flooding.

Flooding has become a major concern for the government and the insurance industry, which have been locked in negotiations to find a way forward. There are estimated to be over 200,000 homes at serious risk of flooding and 1.2m at some risk.

Douglas added: “The decision was taken to end the statement of principles back in 2008, so it’s not as if there hasn’t been time to come up with a new deal.

“Homeowners will be exasperated and worried at this impasse. People need flood cover that is affordable and that won’t happen unless and until a more robust system, which all home owners are likely to have to contribute to, is in place.”

“At present, we are on the brink of an open market which could see insurance becoming out of reach for flood-affected families with obvious consequences for property values and mortgageability.

“The Association of British Insurers has been discussing a proposal known as ‘Flood Re’ which proposes that the total cost of increase flood claims is spread through a levy on insurers to provide a not-for-profit ‘pool’ to meet claims from high-risk homes. This would add an estimated £8 to £15 to all home insurance premiums.

Since it would take time for this reserve to be built up it would in the early years require being underwritten by the government in the event that there is a major flood catastrophe soon after it was put in place. The AA understands the Treasury is unwilling to do this.

A further proposal by reinsurance broker Marsh suggests a different option, known as ‘Flood Mu’.

This would mutualise rather than reinsure flood losses with some of the claims costs arising from a flood disaster distributed over all home insurers although some of the risk remains with the originator of the insurance cover.

It would not require government funding but is more complex in operation. Both concepts would need primary legislation which would take a year or more since it would rely on all insurers being compelled to participate.

“For now, I see no option but to extend the statement of principles for the time being but it’s not a satisfactory way forward – it was only ever seen as a temporary measure.”

He adds that other European countries have effective government mechanisms in place to ensure flood-risk homes can be insured, not dissimilar to the ABI’s proposal. “It’s difficult to see why the UK can’t do something along those lines.”

The AA Index suggests that competition is still keeping home premiums in check although some insurers are showing signs of putting up premiums.

At a time when the government’s own outgoing chief scientist, Sir John Beddington has warned that a ‘need for urgency’ in tackling the ‘irrefutable’ effects of climate change, insurers are becoming more nervous about the implications for more frequent and costly claims. Sir John warned that we are going to see more floods, more sea surges and more storms ‘in our lifetimes’.

Insurers will confirm that greater frequency of severe weather is already affecting more and more homes that have no history of floods.

“I hope there isn’t more serious flooding this year.

“That would almost certainly act as a catalyst for further premium rises for everyone, as happened over the months following the 2007 floods and I wouldn’t expect them to stabilise until a firm solution is in place to tackle what is at great risk of becoming a national embarrassment.”

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