Why insurance premiums are set for an increase

Solvency II is the biggest regulatory challenge currently facing European insurers and replaces 13 existing EU insurance directives. EU member states must transpose Solvency II into their own national laws and insurers must show that they meet all of its requirements by 31 October 2012.

Solvency II is a new system of supervision for assessing the overall financial position of insurers to ensure that they are better equipped to cope with adverse developments worldwide.

In the UK, the FSA will ensure the implementation of Solvency ll along the lines of the regulations imposed on the banking community with more intensive supervision to create higher levels of reserves (solvency margin) to avoid the situation we saw in 2009 with the near collapse of the banking sector.

With more intrusive insurance regulations and higher reserves that insurers will be required to hold, it looks inevitable that this will lead to increased costs and ultimately affect premiums!

Leaseholders, property owners and investors have for a number of years benefitted from very competitive premium rates as a result of the competition between insurers for market share. Premium rates and claims excesses over the past 20 years have not risen to anywhere near the degree of inflation which has affected property prices since 1989, whereas claims repairs, office rents and salaries have risen significantly with inflation in that period.

To mitigate future potential premium rate increases lessees will need to minimise and even eradicate water leaks from baths, washing machines, dishwashers, showers, etc immediately and continue to do so in future years to come.

The profits insurers have historically recorded from investment returns have reduced significantly. Premiums in all sectors must now generate “profits” and insurers are now showing a reluctance to quote for property business which they consider to be “unprofitable”. Even before the effects of Solvency ll, many insurers are now increasing the escape of water damage excess applied to residential blocks of flats as a result of the attritional losses that have been experienced.

 The Chief of Lloyds has warned insurers to raise rates or risk collapse due to the serious natural disasters this year which have depleted insurers’ reserves and that another large event could eat into their capital base.

The principle of underwriting all forms of insurance is that “the premiums of the many pay for the losses of the few”. That principle can only be maintained if the values of those claims for the “few” remain proportionate.

The UK insurance sector’s historical financial strength has seen it survive the financial crisis largely unscathed. However, it must adjust to the demands that have affected all financial institutions, to maintain the confidence of the general public so that the UK may continue being a leader in the insurance sector for many years to come.

Roy Manley is the Business Development Executive for Lockton Companies LLP - Insurance Broker