Household market to report 95% COR in 2012, says E&Y

The household insurance market is expected to report a combined operating ratio (COR) of 95% this year, according to the latest research by Ernst & Young (E&Y).

E&Y said that the industry delivered a good underwriting profit last year, with a COR of under 89%.

The accountancy firm expects the COR to return to 89% in 2013 in the absence of catastrophes.

But E&Y added that the long-term sustainability of the household model would come under pressure in the next few years as new and existing players fight for market share.

E&Y partner Catherine Barton said: “With the exception of 2007, when there were severe floods, household insurance has been consistently profitable for nine years, which sets it apart from other lines such as motor. Insurers have been able to maintain sufficient level of household premiums owing to a lack of price competition and, as a result, there is now some slack in the model. “However, with household insurance being one of the few more profitable lines, we expect competition for market share to heat up over the next few years and for larger players and potentially even new entrants to start to compete on price by addressing some of the slack in the model.”

The research found that compared to motor, household expenses ratios were 15% higher at 42% as companies realised their potential to reduce expenses with almost half of the product’s outgoing currently being spent on expenses.

Barton said: “When the average expense ratio is over 40%, a new entrant with even just a few points of expense advantage could really rock the boat.”

E&Y said that premiums were already being pushed down, with the market average premiums peaking at £190 in January 2012 falling to £184 in July 2012, and costs were increasing. Its results show that for every £100m of weather claims the COR increased irreversibly by approximately 2%.  

E&Y said that it would be challenging for any player to grow its share while the housing market is down, but when it picks up, as expected in 2014, and more people buy houses or exchange properties, more people will need to change their insurance, leading to an increased churn rate.

Barton said: “The strong links between the housing market and building insurance could pave the way for some new entrants to take the household market by storm like Direct Line did in 1986, undercutting the competition by operating an expense ratio that was nearly 10-15% lower than the market average.”

E&Y predicted that despite intermediaries and bancassurance being the traditional route to market for household insurers, new entrants to the household market would use price comparison websites to get to market in the future.  

Barton added: “Household is the natural area for expansion for price comparison sites – after years of decline, advertising in household has started to pick up again and customer awareness of brands in this space is increasing. Customers are more and more familiar with price comparison sites and if a couple of the bigger brands were to move onto aggregators it would really shift the dynamic. Insurers need to anticipate and be ready for this shift or they risk being left behind.”