Today, the Lloyd's of London insurance market published its second largest financial loss on record. The primary reason this has been the gigantic cost of claims related to global natural disasters. These include the terrible Japan earthquake and flooding in Thailand. Despite the fact that Lloyds of London made a profit in the previous year, such catastrophic events can turn profits into losses very quickly. As a result, millions of policyholders here in the UK are now seeing their annual insurance premiums rise substantially. The basic principle of insurance is that the pool of the many pays the claims of the few.
Relative premiums tend to follow cyclical patterns. For a number of years the cost of home insurance in the UK as being at a historical and cyclical low. This means that the number of competing home insurance companies and brokers have consistently attacked new markets, by offering special discounts and price reductions, in order to increase their market share. However, as the cost of reinsurance has gone up, (in conjunction with claims
related to major catastrophes), the UK insurance industry has had to steadily increase prices for virtually all personal lines products.
The long-term economics of the insurance industry are extremely complex. It involves policyholders, brokers, insurance companies, underwriting syndicates, reinsurance and investment funds and other financial institutions. Despite the fact that insurance companies will keep adequate cash reserves available, (to make sure they can pay out on any unexpected insurance claims), sometimes unprecedented catastrophes can occur which can be extremely difficult to predict.
It's not just overseas factors which may increase your insurance renewal this year. There has also been a steady increase in the number of fraudulent insurance claims complaints related to burglary and theft in the home. These
have steadily risen as the full force of the credit crunch, inflationary pressures and subsequent economic recession have put people out of work and taken money out of their pay packets. As a result, insurance companies are trying to recoup their losses, by increasing prices in subsequent years by passing the costs on
The UK insurance market is also rapidly changing terms of the growth in low cost distribution channels. With the advent of telephone call centres and
insurance websites, prices were initially driven downwards. However, recent findings from many independent bodies have included that there has been a backlash from customers against overseas call centres. Likewise, recent reports highlighted that a 'one size fits all' approach from aggregating websites, is leading to the potential for customers to adopt products which may not suit their insurance requirements. The margins are so slim for some insurers who must also bow to the pressure from reinsurance markets. So despite intense competition for market share between insurance companies, consumers in these fast moving markets are also finding that the quotations they are receiving are rising in a very difficult insurance market.
The intermediary insurance broker may also influence the relative price of home insurance products. Insurance brokers are obliged to declare any administration fee they choose to add on to and insurance quotation. If brokers
perceive that the 'market is rising', they are less worried about adding on a reasonable administration charge onto the overall cost of the quote. The other factor which indirectly influences pricing is the collective attitude of
insurance brokers who have their own schemes. Occasionally, a broker may not want to take on a bit of new business because of the nature of the risk itself. They may behave in such a cautious manner so as to avoid taking on a potentially damaging risk that could reduce their profit share in their book of business. Generally speaking, the greater the risk the greater the premium is likely to be.
Finally, overall premiums are indirectly influenced by the relative profitability insurance companies achieve on their investment income. Investment income is dominated by equity markets. However, the global economic liquidity
crisis has dampened equity markets. This in turn this has depleted the relative profitability of the earnings on investment income (which large global reinsurance, and UK insurance companies have enjoyed). In boom times, the huge pool of cash policyholders reserves gave the industry incremental profits from investments in securities with high yields. However, such healthy returns are becoming increasingly volatile and unpredictable, as equity prices have fallen. This has also contributed to the pressure on the profits of reinsurance and syndicated markets, such as Lloyd's of London.
There is not much policyholders can do about all of this global economics. Higher prices seem to here to stay for a period. Ultimately, it is never sensible to cut corners in your own insurance needs, by reducing cover levels or increasing policy excesses.