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Insurance prices reflect the cost of risk. For British homeowners a combination of inflation and bad weather in recent years has pushed this to a record high. Average annual premiums hit almost £400 in May and June, over a third higher year on year, according to the Association of British Insurers. With tougher terms and higher prices baked into reinsurance markets, higher bills are likely to last.
Insurers were behind the curve on pricing post-pandemic and caught off guard by inflation. The UK sector in 2022 generated a combined ratio of 122 per cent, significantly lossmaking, according to EY. In the US, home insurers last year racked up losses of $15bn, the worst since at least the year 2000. Prices everywhere have risen sharply. The consumer market is following a shift in reinsurance, which has left that subsector well placed as the critical hurricane season approaches.
Overall losses from weather events are rising but their shape is benefiting the likes of Swiss Re, Munich Re and Hannover Re. A hardening of reinsurance terms has lifted the threshold for payouts. Losses for homeowners in recent years are a result of lower intensity but higher frequency events — not big hurricanes but smaller storms. Damage from hailstones to solar panels, say, has been an acute source of losses.
Fewer large single loss events has helped the developed market reinsurance sector outperform broader insurance by 20 per cent on a total return basis since the end of 2022. First-half results from the reinsurers showed prices continue to remain firm. “It is difficult to see how property insurance prices come down for customers following the structural repricing of risk at reinsurers,” says Tryfonas Spyrou at Berenberg.
This is a market reset: effectively, reinsurers have returned to providing balance sheet protection for insurers, instead of protection for earnings. Shareholders of mass-market home insurers also desire more of the latter, hence the price rises for customers.
There is now substantial excess capital in the system, over management targets. The three European reinsurers have some €40bn of excess capital, thinks Berenberg. Only about a quarter of that would be eaten up by a $200bn loss event. Specialist London names have accrued similar gains. Excess capital this year might amount to a tenth of market value on aggregate for Hiscox, Beazley and Lancashire, according to Jefferies.
Hefty capital returns to shareholders in reinsurers are expected, with shares likely to follow. But in the mass market, pricing is still catching up with this market shift — suggesting more pain for homeowners to come.
