Current Issues in Household Insurance

1
Current Issues in Household Insurance

• Rob Cowley
• Norwich Union
• April 2002

2
Themes...

• 1. Galloping Inflation

• 2. Rampant Under-Insurance

• 3. Impending Doom?

3
The surface is (relatively) calm...
All Household Perils
Inflation 1996 - 2001 5 p.a.
4
but there are swirling sub-currents!
5
2001 Household Costs by Peril

• Subsidence 5
• Weather 12
• Fire 14
• Theft 22
• Other 47

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• 1. Galloping Inflation

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Subsidence costs have fallen in recent years...
Subsidence
Inflation 1996 - 2001 -3 p.a.
8
and Theft frequencies have declined steadily...
Theft
Inflation 1996 - 2001 1 p.a.
9
in line with falling unemployment.
10
However, Damage costs have been rising
Fire
Inflation 1992 - 2001 18 p.a.
11
Accidental Damage
Inflation 1992 - 2001 9 p.a.
12
Escape of Water
Inflation 1992 - 2001 13 p.a.
13
Weather
Inflation 1992 - 2001 10 p.a.
14
Flood
Inflation 1992 - 2001 17 p.a.
15

• 2. Rampant Under-Insurance

16
Buildings SI typically linked to Rebuilding Costs
Indices courtesy of RICS Building Cost
Information Service Ltd.
17
Contents SI often linked to RPI or similar
Source www.statistics.gov.uk
18
Were earning more and saving less.
Source www.statistics.gov.uk
19
Theft revisited
Theft
Inflation 1996 - 2001 1 p.a.
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• 3. Impending Doom

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Conclusions

• A tight labour market and rising consumption are
  driving Household costs upwards
• This has been offset in the past by falling
  Subsidence and Theft claims, but these are now
  stabilising
• Sums Insured are not rising in line with
  underlying claims inflation

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What happens next?

• Continuing Economic Growth
• Tight labour market and rising consumption
  continue to drive costs upwards
• Subsidence and Theft frequencies stop falling,
  the average costs of Theft claims starts to rise
• Recession
• Lower rates of consumption and slacker labour
  market reduce pressure on average costs
• BUT rising unemployment leads to higher theft
  frequencies

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In short...

• Significant increases to rates or to Sums Insured
  are going to be necessary to maintain levels of
  profitability in the UK Household market