Home insurers profitability for 2016 on a knife-edge, as rates fall, costs rise and Flood Re levy comes in

21 October 2016

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  • Insurers paid out £2.9bn in claims in 2015, up 6.5% from 2014
  • Weakened pound and low interest rate environment means claims inflation in 2016 is expected to rise by 2.3%
  • £180mn Flood Re levy to hit insurers’ bottom line, raising costs by 3%

Profitability is expected to plummet in 2016 for the UK home insurance market after eight years of good earnings. Insurers are expected to achieve a barely profitable 99% Net Combined Ratio (NCR) in 2016, according to the latest EY analysis, which assumes the year ends unlike how it started, with no major flooding, and with reserve releases of 1.9%, without which insurers would be in the red with a 101% NCR.

Home insurers have experienced continued rate deflation (-1.8%) throughout 2016 alongside claims inflation at 2.3% year on year, as they struggle to remain competitive in a continued low interest rate environment with ever rising expenses. This, combined with a 4% overall rise in Insurance Premium Tax in just one calendar year and the introduction of the Flood Re levy has meant the industry has had to deal with significant additional costs if they are not to raise prices for customers.  

Tony Sault, UK General Insurance Leader at EY, comments: “Unfortunately it will not come as a surprise to the industry that the run of low 90s NCRs has come to an end. And, if the UK is hit with damaging weather towards the end of the year, driving claims up, the modest profitability we are predicting will be lost, leaving insurers between a rock and a hard place in terms of relying on reserves and increasing premiums.

“The effect of the continuing the low interest rate is really squeezing the insurance sector, and as the pound weakens further, import prices rise, which could see claims inflation rise further.”

In 2017 it is predicted that home insurers will fall firmly into unprofitability with an NCR of 101%, and premiums are forecast to drop a further 1.7% from 2015 levels.