Climate change spells end of falling premiums

The government's advisory body, the Committee for Climate Change, says the UK can't expect to escape future extremes of weather. Picture: Ian Rutherford
The government's advisory body, the Committee for Climate Change, says the UK can't expect to escape future extremes of weather. Picture: Ian Rutherford
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HOMEOWNERS will be forced to dig deeper for their annual insurance policies over the coming years as a combination of factors drives costs back up again.

Home insurance premiums have risen for the first time in three years, new figures show, and they’re expected to continue climbing as insurers respond to government and regulatory measures by passing costs on to customers.

Car insurance prices are also going up again after several years of cuts, according to the latest quarterly report from AA Insurance.

It revealed that the average “shop-around” premium on buildings and contents policies – based on the five cheapest quotes – edged up by 1.3 per cent in three months to the end of June, bringing an end to a sustained period of falling prices.

“There has been significant downward pressure on home insurance premiums for a number of years,” said Kevin Pratt, insurance editor at MoneySuperMarket. “Burglary rates are in long-term decline, so there have been fewer claims overall. And we’ve had a couple of years of generally benign weather with no major storms or floods, which has also reduced the number of home insurance pay-outs.”

But insurers warn that costs will now rise more sharply as competition pressures ease and a new government tax hike is passed on to homeowners. Janet Connor, managing director of AA Insurance, claimed that the Chancellor’s decision in the recent Budget to increase insurance premium tax (IPT) from 6 to 9.5 per cent will add about £5 to the average home insurance policy.

Insurers will have “little choice but to pass it on to customers” after it takes effect in November, said Connor, describing the change as a “stealthy imposition”.

Other factors may push costs up even further. They include a long awaited deal between insurers and the UK government aimed at keeping premiums affordable for properties at risk of flooding. The Flood Re scheme, set to take effect next spring, will cover roughly 350,000 such properties. Around one in 22 homes in Scotland is at risk of flooding, the Scottish Environmental Protection Agency has estimated.

However, Flood Re will add another £10 to home insurance premiums, Connor said. She also warned that insurers are preparing for the next “extreme weather” events to hit the UK. “In my view, it will take a series of claims in excess of £1bn to trigger a premium spike,” she said.“The government’s advisory body, the Committee for Climate Change, is warning that the UK can’t expect to escape future extremes of weather.”

Car insurance costs have also jumped, the latest AA index shows. The average quote for comprehensive cover went up 5.32 per cent over the three months to the end of June, the first significant quarterly increase since winter 2011.

The recent Watson insurance index showed a similar trend. It reported that while Scots still pay the lowest premiums in the UK, motorists north of the Border have suffered the biggest increases over the past three months.

Further rises are “inevitable”, said the AA, with Connor suggesting premiums could go up by more than 10 per cent this year. She cited the effect of the IPT hike, while an upwards trend in personal injury claims is adding to the costs insurers face, which will invariably be borne by customers.

Regulatory action may also impact on home and car insurance premiums over the coming months. The Financial Conduct Authority (FCA) has proposed to outlaw the practice of pre-ticked ‘add-ons’, where customers must opt out of additional expenses when buying insurance. Its research found that around one in five people don’t realise they’re buying add-ons – such as legal expenses or breakdown cover – as part of insurance policies, resulting in overpayments of more than £108 million a year.

“It remains to be seen whether the regulator’s crackdown on the selling of policy add-ons such as legal expenses cover will lead them to up the prices of their main contracts,” said Pratt.

Insurers hiking premiums for customers who automatically renew their policies could soon be forced to include an “honesty box” on their renewal letters explaining why prices are going up. The proposal is one of several that the City regulator will weigh up when it launches a review in September aimed at tackling the issue of auto-renewal, where insurers raise premiums for loyal customers who don’t choose to shop around for a better deal.

“What we know for sure is that it certainly doesn’t make sense to stick with the same insurer year after year, as going to a new company will more than likely secure you a better deal,” said Pratt.