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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 driven them to record highs. Average annual premiums reached almost £400 in May and June, more than a third higher than a year earlier, according to the British Insurance Association. With tighter terms and higher prices in reinsurance markets, the higher bills are likely to continue in the future.
Insurers lagged on pricing after the pandemic and were caught off guard by inflation. The UK sector posted a combined ratio of 122 percent in 2022, making it significantly loss-making, according to EY. In the US, home insurers racked up losses of $15 billion last year, the worst since at least 2000. Prices have risen sharply everywhere. The consumer market is following a shift in reinsurance that has positioned this subsector well in light of the upcoming critical hurricane season.
Overall losses from weather events are increasing, but their form is benefiting companies such as Swiss Re, Munich Re and Hannover Re. A tightening of reinsurance terms has raised the threshold for payouts. The losses for homeowners in recent years have been the result of events with lower intensity but higher frequency – not major hurricanes, but smaller storms. Damage from hailstones to solar panels, for example, was an acute source of losses.
Fewer large single loss events have helped the reinsurance sector in developed markets outperform the broader insurance sector by 20 percent on a total return basis since the end of 2022. Reinsurers’ half-year results showed that prices remain stable. “It is difficult to imagine that property insurance prices for customers will fall following the structural repricing of risk at reinsurers,” says Tryfonas Spyrou of Berenberg.
This is a market reset: in fact, reinsurers have gone back to protecting insurers’ balance sheets rather than their profits. Shareholders in mass home insurers also want more of the latter, so prices for customers are rising.
There is now considerable excess capital in the system, which exceeds management targets. The three European reinsurers have about €40 billion in excess capital, Berenberg believes. Only about a quarter of that would be eaten up by a $200 billion loss. London-based specialist companies have made similar gains. According to Jefferies, excess capital at Hiscox, Beazley and Lancashire could together be a tenth of market value this year.
Strong capital returns for reinsurer shareholders are expected, and share prices should follow. But in the mass market, pricing has yet to keep pace with this market shift – suggesting that homeowners may suffer even more.
