Analysis of the latest UK household insurance results by Ernst & Young shows that the industry as a whole achieved a good underwriting profit for 2011, with a combined operating ratio (COR) of under 89. Despite the variable weather and flooding, Ernst & Young predicts a reported COR of 95 for 2012, and a 89 cat-free reported COR in 2013. However, Ernst & Young also predicts that the long-term sustainability of the household model will come under pressure in the next few years as new and existing players fight for market share.
Catherine Barton, partner at Ernst & Young says “With the exception of 2007 when there were severe floods, household insurance has been consistently profitable for 9 years, which sets it apart from other lines such as motor. Insurers have been able to maintain sufficient level of household premiums due to a lack of price competition and as a result there is now some slack in the model. However, with household insurance being one of the few more profitable lines, we expect competition for market share to heat up over the next few years and for larger players and potentially even new entrants to start to compete on price by addressing some of the slack in the model.”
This year’s results show that household expense ratios are a full 15% higher than motor expense ratios (42%: 27%). Nearly half of the product’s outgoing is being spent on expenses, which means there is potential for companies to reduce expenses and therefore start to compete on price.
Brown comments “When the average expense ratio is over 40%, a new entrant with even just a few points of expense advantage could really rock the boat.”
Premiums are already being pushed down, with the market average premiums peaking at £190 in January falling to £184 in July, and costs are increasing. The analysis of results show that for every £100m of weather claims the COR increases irreversibly by approximately 2.
The tipping point will be when the housing market picks up
It will be challenging for any player to grow market share while the market doesn’t churn. When the housing market picks up, as it is expected to in 2014, and more people buy houses or exchange properties, more people will need to change their insurance, which will naturally increase the churn rate.
“The strong links between the housing market and building insurance could pave the way for some new entrants to take the household market by storm like Direct Line did in 1986, undercutting the competition by operating an expense ratio that was nearly 10-15% lower than the market average."
While traditionally the route to market for household insurers is through intermediaries and bancassurance, Ernst & Young predicts that new entrants to the household market will use price comparison websites to get to market.
“Household is the natural area for expansion for price comparison sites–after years of decline, advertising in household has started to pick up again and customer awareness of brands in this space is increasing. Customers are more and more familiar with price comparison sites and if a couple of the bigger brands were to move onto aggregators it would really shift the dynamic. Insurers need to anticipate and be ready for this shift or they risk being left behind.”
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