- UK home insurers will scrape a profit in 2020, but fall into the red in 2021
- COVID-19 temporarily changes claims patterns, reducing overall volume and temporarily lowering average costs
- FCA Pricing Market Study drives fundamental market changes, creating market uncertainty
The UK home insurance market is forecast to scrape a profit in 2020, as it reels from severe weather in Q1 - including the wettest month on record in February - before falling into unprofitable territory in 2021. The Net Combined Ratio (NCR) for 2020 is predicted to be 99.2% according to the latest EY analysis, which is flat year on year, and remains significantly better than 2018’s 106.1% NCR. This profitability is however forecast to be short-lived, propped up by a fall in claims due to COVID-19, and the industry is expected to fall back into the red in 2021 with an NCR of 102%.
COVID-19 impact on home insurance
Despite the adverse weather at the start of the year, claims inflation across all home insurance lines in 2020 is expected to turn negative, falling by 2.7% due households spending increased amounts of time at home during lockdowns.
Claims volumes have continued their downward trend across all home insurance lines in 2020, falling further than expected due to COVID-19 lockdowns. While the claims driven by fire-related accidents has risen, theft from home break-ins and water damage due to broken pipes or malfunctioning home appliances has reduced significantly this year. In Q2 of 2020, claims relating to theft were down 68% year on year, and household water damage claims were down 30% for the same time period year on year.
Excluding weather claims, the market saw a 17% year on year drop in total claims in Q2 2020. This is however expected to be a one-year blip, trending back up in 2021, although future lockdowns could impact this.
Claims inflation is forecast to pick up dramatically in 2021, rising 4.4% from the 2020 low, although this could change depending on possible future lockdowns. Premiums overall are predicted to remain flat throughout 2020 and 2021.
The FCA Market Review on pricing will hit home insurers’ bottom line
The FCA’s final report into the general insurance pricing market was published in September, representing a major regulatory intervention in the market. Many insurers will need to overhaul their business model and reset their pricing structures to comply. The regulation is expected to drive fundamental changes in the market, and the impact for each policyholder will be variable depending on the historical propensity of customers to switch. The transition period will be particularly challenging to predict and will be heavily dependent on competitive dynamics.
Tony Sault, UK General Insurance Leader at EY, comments:
“While it is good news that the home insurance sector will achieve profitability this year, which it has done for almost all of the last decade, severe weather and property damage claims are really challenging the market. Coupled with the costs related to the regulator’s pricing review, it is almost certain that the sector will enter the red in 2021.
“COVID-19 lockdowns have altered recent claims patterns, and this year’s results will be unique to any other year. Through lockdown, as people have spent a lot of time in their homes, there has been a reduction in water damage claims due to households responding quickly to leaks, and a dramatic drop in claims relating to home break-ins and theft.
“Overall, there are a number of challenges that the home insurance market needs to overcome if it is to achieve sustained profitability over the long term. All of this at a time of political and economic uncertainty, as consumers and businesses deal with the impact of COVID-19 and difficult economic conditions.”
Notes to editor
- The results analysis for this release is based on Solvency II returns and ABI data