Home insurance premiums continue to fall despite flood damage
Serious flooding from the effects of Storm Desmond in Cumbria is expected to result in home insurance claims of around £250m. But despite some commentators suggesting otherwise, AA Insurance doesn’t expect the storm to lead to widespread premium rises.
Mike Lloyd, director of AA Insurance, believes that claims in excess of £1bn would be necessary to trigger across-the-board increases.
According to the AA’s benchmark British Insurance Premium Index, home insurance premiums have been falling fairly steadily for four years. Nearly £50 has been wiped of the typical Shoparound quote for a new combined buildings and contents policy from £191.83 at the end of 2011 to £149.30 today. The broker expects premiums during the fourth quarter to again show a modest fall.
“The UK hasn’t suffered a severe winter since 2010 and although there have been flooding events (such as February 2014), none have been anywhere as severe as the 2007 disaster which cost insurers around £3.3bn. Following that widespread damage our Index, which has been tracking the quarterly movement of home insurance premiums since 1994, showed that the average quote for cover rose by around 20% over the following year.
“And while benign weather may have triggered premium falls in the first place, the continuing downward momentum now has more to do with competitive pressure.
“Insurers have sufficient reserves to meet claims such as the recent flooding and, although those affected will sadly expect to suffer premium and / or excess increases, insurers will stay with them as the heart-breaking rehabilitation process progresses. And on the whole, insurers and brokers including AA Insurance have responded well to calls for help from customers.
“But we don’t expect average premiums overall to be affected.”
Mike Lloyd points out that the Government has spent tens of millions of pounds on flood defences and alleviation schemes over recent years. “But the record rainfall has shown that in some cases defences have failed. It underlines the importance of continuing to invest in flood protection as severe weather becomes a more frequent and extreme feature of the British climate.”
The much-delayed launch of Flood Re in April 2016, will enable up to 300,000 householders in flood-prone areas to obtain affordable insurance on the open market. The scheme, an initiative between insurers and the Government, will be funded partly from insurers and partly from a levy on all home insurance policies and most home insurers are eventually expected to join the scheme.
“This is long overdue and it will nevertheless be welcomed by at-risk home owners. But the Government can’t use the advent of this additional cover as an excuse to reduce flood defence spending.”
Mr Lloyd adds: “The home insurance market’s profitability is dependent on the frequency and effects of severe weather including floods, freezes, drought and subsidence. But home premiums also tend to be less volatile than motor and it would take widespread weather damage to trigger a rapid change in rates across the market.
“Nevertheless, some analysts believe that home premiums can’t fall much further and although we don’t believe we’ll see much significant pressure on premiums until and unless there is widespread severe weather, we do expect home premiums to bottom during the first half of 2016."