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Have home insurance premiums hit the bottom?

24th January 2016 Print

The latest benchmark AA British Insurance Premium Index, for the fourth quarter of 2015, suggests that three years of falling premiums has come to an end.

The index show small increases in the average quoted Shoparound premiums for home buildings, contents and combined policies – the first since 2011.

The average Shoparound quote for an annual building policy increased by £2 or 1.7%, from £108.59 to £110.46 – but this is still 1.4% less than a year ago.  For contents, the premium increased by just 41p (0.7%); down 2.4% over the year and for a combined buildings and contents policy, up by under £4 (2.3%) from £149.85 to £153.24 – down 4.2% over the year.

Claims for homes ruined by the recent devastating floods are now expected to reach an estimated £1.3bn of which about half is for domestic properties, while disruptive weather including sub-zero temperatures, snow and further wind and rain, are expected to add to claims over coming weeks.

However, the AA says that the increase in Insurance Premium Tax (IPT) –introduced from 1st November – can be blamed for the increase, not flood damage. Without the IPT increase premiums would once again have fallen.

Mike Lloyd, director of AA Home insurance says: “Home insurance premiums have been falling fairly steadily for four years.  The trend appears to be continuing, albeit at a slower rate, if you take out the effect of the IPT increase.

“Nevertheless, the recent flood claims appear to have slowed the fall in premiums and could lead to modest premium increases over the rest of 2016.

“Past experience suggests that claims in excess of £1bn in a single event would trigger a premium increase and for domestic property they currently fall short of that.  And, competitive pressure remains tough.”

Mr Lloyd points out that over the past two years the weather has been benign with mild winters, meaning that insurers’ reserves for weather claims have not been met.  This has led many insurers to reduce premiums, increasing competitiveness and prompting the downward premium trend.

By comparison, the 2007 floods caused £3.3bn claims and over the following 12 months premiums rose by 20%.

The 2007 flooding was a catalyst for setting up Flood Re, which is due to be launched in April this year and is designed to enable those living in areas of high flood risk and in homes built before 2009, to obtain affordable insurance.  This joint initiative between the Government and the insurance industry, will be funded by a levy on all home insurance premiums.

Mr Lloyd adds: “Whatever the rest of the winter throws at us, the insurance industry is well prepared to support those whose homes are devastated.  But there is little room to absorb significant claims costs which will ultimately, reverse the downward trend.”