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Regulation Update

Why premiums have been rising

Why have premiums gone up so much in the past few years?

You may have seen in the news or from the likes of Martin Lewis that Home Insurance premiums have risen dramatically over the last few years. In this post, we’ll explore some of the possible reasons and the history around this.


Changes in pricing regulation

Back at the start of 2022, we wrote a blog post about the FCA’s changes to pricing regulation (original post here). In it, we explained how the FCA had outlawed the practice of ‘price walking’ where renewing customers would be charged more than the equivalent new customer. The result is that now you must legally be offered the same price or lower as a renewing customer compared to a new customer purchasing through the same channel.

As we predicted, the impact of this was that most people saw their premiums rise, as companies were no longer able to afford to offer loss-leading introductory offers, since they could no longer offset the cost by charging renewing customers more for the same cover. Given that most large insurers had a sizeable book of existing customers, most opted to preserve the income from the higher prices on existing customers by pushing up the price of new business. This meant that the average premium in the market increased for everyone. While at coverbaloo we have never priced walked any customer, and have always charged the same for new and existing customers, we were sadly still affected by this due to our underwriters changing their prices to account for it elsewhere.

Extreme weather

It is sadly becoming more common to see extreme weather events sweeping the country multiple times per year. Floods and storms can cause immense damage, and are increasing the claims frequency and value on the average policy. If people are claiming more often than was previously expected, then this drives up the cost of claims and ultimately leads to higher prices.

Home working

Similarly, but perhaps less obviously, the rise of home working following the pandemic has also caused a rise in the frequency of claims. We are spending more time in our homes than ever before, which means there is more time for accidents or damage to happen, including high impact events such as fires. While it may seem like many people have been working at home more for a while now, pricing models for insurance don’t tend to react so quickly, so it will still take some time for the resulting price increases from this to come through.

Cost of claims inflation

In the same way that you will have been affected by rising prices due to inflation, insurers have been hit by the same rises, particularly when it comes to claims. When everything costs more money, from replacing a TV to employing a contractor to come and fix some damage, the increased costs are generally been passed on to customers, because ultimately…

Insurers have been losing money

While it may be hard to believe given the large price rises, it was reported that in 2022 not a single home insurer made money. This is measured by what’s called a ‘combined operating ratio’, which shows what percentage of money was paid out in claims compared to the amount of money taken in through premiums. In 2022, the average ratio was 122%, meaning that for every £100 of premiums paid, £122 in claims were paid out. Beyond the reasons already mentioned, supply chain pressures caused by global conflicts and post-Brexit effects have also increased ongoing costs. Reinsurance premiums (insurance that insurers take out to cover major claims events) have risen dramatically for insurers as well, which all adds to the same pressure. At the end of the day, the companies underwriting the insurance need to make money, and if they aren’t then like most businesses they will either increase their prices or withdraw from the market, like Zurich did with its UK home insurance in 2023.

What can I do?

The most important thing is still to make sure you have the right cover in place for you. Many people may react to a higher premium by looking to remove parts of their cover, but don’t take that decision lightly as you may come to regret it if you need to make a claim. An alternative would be to review your excess level. Increasing this can reduce your premium, but you’ll have more to pay in the event of a claim. This may be a better solution for some as it maintains your cover for larger losses, leaving you to just cover the smaller risks.

Shopping around with other providers can be a good idea, however you may have to moderate expectations of finding it cheaper than last year given that most providers have increased their prices. It is still forecast that prices may rise by another 30% over the next two years. There are always exceptions though, as different underwriters may have different views of the risks of your area or property, however…

Beware of cheap cover…

Price comparison sites still appear to have some cheap cover on there for your home and contents, but think twice before jumping into something if it looks too good to be true. Several providers’ reaction to the pricing changes in 2022 was to create new ‘essentials’ products. These new policies stripped out many areas of cover and reduced cover limits in order to keep the price down. The FCA is investigating this practice with concerns that many customers don’t understand the cover they have (or haven’t!) got when purchasing these new policies. One of the big areas that we’ve noticed disappearing from cover is alternative accommodation. This is the costs of housing you somewhere else (a hotel or a rental house) while your home is uninhabitable or being repaired. This has been one of the largest increases in claims costs so your money might not go as far as you need, since major claims that require this, such as fires or floods, can leave you out of your home for one or two years. Always make sure you read through your policy before buying to make sure it covers you for what you need and expect it to.

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