Don't bring the house down

Ernst & Young’s expectation that the household insurance business faces a battle for market share will not be welcome news for UK general insurers.

The accounting firm said in its analysis of household insurance results that the industry made a comfortably profitable combined ratio of 89% in 2011, that it should report 95% in 2012 as a result of the various weather losses, and should be back at 89% in 2013, absent any further severe events.

E&Y also pointed out that the business line would have had a seven-year run of consistent profitability, had it not been for a flood-induced blip in 2007.

However, it is precisely this profitable history that prompts E&Y to believe that competition will start to increase. Insurers have scant opportunity to make profits elsewhere in their books and may therefore want to grab as much home insurance as possible.

The pained cries from industry chief executives about the parlous state of commercial lines continue to resound through the industry.

Moreover, despite the continuing losing streak in personal lines motor, rates are already starting to decrease after the record rises seen in 2010 and 2011 – even though proposed legal reforms have not yet been introduced, much less had a chance to dampen the bodily injury inflation trends that sparked the rate hikes in the first place.

E&Y predicts that if the housing market recovers in 2014 as expected, people will also start switching their home insurance policies. This would present an opportunity for those with the stomach for it to cut rates to grab market share.

The accounting firm also expects aggregators to play a bigger role in the household market. Insurers clearly agree. Allianz, for example  is in the process of completing the roll out of its Your cover household product for aggregators on the major price comparison sites.

All this points to the transformation of a currently profitable market into one more resembling personal lines motor. This is the last thing the industry needs when it is struggling to make a profit in its other lines.

A grab for market share can make an insurer the most dominant player in a particular line, but that does not mean it will be the most profitable. Motor market share grabs by companies such as AXA and Admiral have backfired and Direct Line, which has a market-leading position in UK personal lines, has struggled to keep its combined ratio below 100%.

Insurers should learn the lessons of the past and think before piling in.