Are insurance firms playing it safe?

Aug 4 2008 by Alistair Houghton, Liverpool Daily Post

Even if you live nowhere near the sea, you could be paying for those who do. Jeremy Gates reports

ALTHOUGH they may live miles from a river or coastline, many Britons could be paying sizeable sums for household insurance to protect other people’s homes against a risk of flooding in an era of dramatic climate change.

This intriguing thought emerges from the Automobile Association’s British Insurance Premium Index, which has tracked home insurance premiums since 1994.

The AA confirms a “dramatic” 22% surge in the Shoparound index (an average of the three lowest premiums for each risk quoted in the index) since last year’s floods.

“The days of cheap home insurance deals may be numbered,” says AA Insurance director Simon Douglas.

“I believe the sharp rise over the past year, indicated by the Shoparound index for buildings cover, suggests insurers offering the lowest premiums have revised rates to take account of predictions of more frequent flash flooding events.”

Douglas thinks insurers are responding to new mapping from the Environment Agency, which considers risks of sudden flooding as a result of heavy rainfall that can overcome local drainage systems and hit thousands of homes.

“Last year, insurers dealt with 180,000 flood claims in 23 counties, paying £3bn in claims,” he says.

“Around half of those were in areas not known to be prone to flooding.”

AA Insurance says the average buildings premium in July was £209.52, while contents cover was £128.69. Combined cover came in at £299.42.

Measured on price alone, the Shoparound premium produced a figure of £126.29 for buildings and £72.41 for contents. The average cost of combined cover was £192.87.

It’s not just floods that alarm home insurers. Church spires in Lincolnshire wobbled in February in Britain’s biggest earthquake for nearly 25 years, and tremors touched Wiltshire and Newcastle-upon-Tyne.

Chimneys crumbled in Folkestone, Kent, in April, 2007, for the same reason.

Even before the AA suggested millions of homeowners could get bills for climate change that they might not deserve, it was clear home insurance is a competitive market place.

The Post Office, which entered the market in November, 2004, looked particularly cheap in early 2008.

Its policies offer separate or combined home and contents cover, with a Home Assistance option providing 24-hour assistance for emergencies such as burst pipes and blocked drains.

At present, buyers of a Post Office insurance policy get £50 cash back (for buildings and contents cover combined) and £25 for a single policy.

But Post Office premiums have slipped down the league table of cheapest providers at financial website moneysupermarket.com.

There are also discounts at Nationwide BS, which has lifted home insurance sales by 29% in a year.

Until August 31, it’s offering a 20% discount for this year and next on combined buildings and contents cover, and another 10% off for those buying online.

Of course, if a claim has to be made, quality of cover – and level of excess – tend to be more important than price.

Sainsbury’s Home Insurance, which includes cover for up to £500 against bikes being stolen, says 16% of the claims it has settled since 2004 concerned thefts from home, and 84% on thefts away from the home.

HAD be been insured with Sainsbury’s, Tory leader David Cameron wouldn’t have batted an eyelid about losing his bike.

All these points – and particularly the cover for expensive electrical items like home computers, laptops, VCRs and TVs besides items like replacement locks and keys – need to be considered alongside price when a policy is chosen.

But the comparison site Gocompare.com claims the difference between average price and cheapest home cover is as wide as 45% – meaning customers who shop around can get three years’ cover for the price of two.

At rival comparison site Confused.com, product director Simon Lamble says: “Customers save an average £193.81 on home insurance on our site, but many people never change their insurer out of loyalty.

“Renewal premiums should really decrease year-on-year, unless the policy is affected by changes such as adding an extension, so it’s important to shop around for the best price.”

Traditionally, cost-conscious consumers who might change car insurers each year take less interest in home insurance.

Peter Gerrard, at moneysuper-market.com, says insurance “is not a sector in which certain providers invariably appear as a best buy.

“Applicants in identical houses giving different answers to one specific question get a wide variation in premiums quoted,” he says.

However, there is one new option for financially aware consumers who rarely claim on home insurance: Lloyds TSB Insurance’s Personal Home Plan is tailored for older people in safe suburbs.

Lloyds TSB sales director Alasdair Lenman says the product idea was triggered by a comment from an 80-year-old customer who questioned why her policy included bicycle cover when her cycling days were long gone.

“Personal Home Plan fundamentally changes the way the over-50s buy insurance, enabling us to offer more tailored premiums and treat customers as individuals. We see a market of around 3m discerning shoppers who don’t want standard off-the-shelf cover,” Lenman says.

With essential cover for fire, theft, flood and subsidence as standard, Personal Home Plan offers applicants any combination of 21 “pick and mix” options – including garage or shed contents, and “matching contents” cover, so that if a sofa is damaged, an entire three-piece suite is replaced.

Lloyds TSB might be trying to recreate the “cherry-picking” formula that esure pioneered in motor insurance.

By attracting mature consumers who are less likely to claim, it offers lower premiums – and also a 50% discount for homeowners who haven’t claimed for 10 years or more. Customers can also opt to protect their “no claims” bonus.

“The savvy customer typically claims as a last resort and they’ve told us they want to be rewarded for careful behaviour,” Lenman says.

Age discrimination laws mean Lloyds cannot refuse the policy to younger applicants.

But things might work out that way, anyway.

“Age may be a critical ingredient on Lloyds TSB’s policy,” Gerrard says.

“When I applied as a 29-year-old, the policy wasn’t much better than many others.

“When I tapped in as 50-plus, it became an excellent buy.”

It will be interesting to see if the new Lloyds TSB strategy delivers good value over the long term.

If it does, rivals might have to rethink their approach.

SAINSBURY’S Bank Home Insurance (0800 731 7978 and www.sainsburysbank.co.uk); Lloyds TSB Insurance Personal Home Plan (0800 022 4789 and www.lloydstsbinsurance.co.uk/over50s). Both Moneyfacts.co.uk and uSwitch.com have added home insurance to their services. Post Office offers a home insurance quote and policy over the counter at 200 UK branches.