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The Actuary The magazine of the Institute & Faculty of Actuaries

Severe weather claims ‘set to push up home insurance premiums’

Home insurance premiums remained largely unchanged in the last three months of 2012 but a flurry of claims related to recent severe weather will push up the cost of cover in the early part of this year, according to the AA.

Floods insurance cover risk
Photo: iSTOCK

The insurer’s latest British Insurance Premium Index, published today, shows that the average cost of the cheapest buildings insurance rose by just 0.2%, from £175.57 to £175.95 in the period from October to December. Over the same period, the average cost of the cheapest contents insurance went up by 0.5%, from £89.26 to £89.73.

The summary, which is based on an average of the cheapest five quotes for an annual home insurance policy, also shows that the average quote for a combined buildings and contents policy fell by 0.6%, from £231.03 to £229.70.

The AA noted, however, that the market average for all quotes showed across-the-board increases – up by 1.7% - from £228.48 to £232.41 – for buildings cover, by 1.4% - from £115.18 to £116.81 - for contents cover and up by 1.3% - from £301.85 to £305.92 for a combined policy.

Simon Douglas, director of AA Insurance, said that the estimated £1bn last year’s flooding had cost insurers was yet to be reflected in premiums, with diverse views in the insurance industry over what impact the severe weather would have.

He noted, however, that many insurers believed premiums needed to increase to reflect the trends that suggested climate change would bring a greater likelihood of damaging weather.

‘Some insurers are pointing to a need to build reserves further to meet potentially significant claims. Others believe that rates are already taking this into account,’ Douglas explained.

‘As recent severe weather claims come in, coupled with the January snowfalls, I believe premiums are likely to rise in the early part of the year.’

Douglas added that, while he expected competition among insurers to keep premium increases to a minimum, uncertainty over homes in flood-prone areas would secure affordable insurance in the future were weighing upon the industry. The current government-insurer agreement guaranteeing homes in flood-prone areas cover expires at the end of June and a successor deal is yet to be finalised.

‘Any flood cover agreement is likely to have an impact on premiums – some estimates suggest around £8 per policy – for all homeowners, not just those in flood risk areas,’ he said.

Today’s index also reveals the overall trend towards car insurance costs falling continued in the final three months of 2012. The average of the cheapest five quotes for a nationwide basket of risks fell by 2.9% over the final quarter, from £812.92 to £789.16 – the lowest average since October 2011. The average for price comparison sites also fell – by 2.6% from £611.87 to £596.66.

However, the AA stressed that this masked differences between specific groups in the population. European law changes brought an end to gender-based insurance pricing on December 21, and the AA’s figures show that the final quarter saw average premiums for women aged 17-22 increase by 4.7% while average premiums for men of the same age fell by 1.9%.

Despite this, Douglas railed against reports that premiums had increased by 50% for young women – figures that ‘don’t paint a true picture of what is actually happening’.

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