More expensive home insurance leaves some investors to reap the rewards

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Insurance prices reflect the cost of risk. For British landlords, a combination of inflation and bad weather in recent years has pushed this to a record high. Annual average premiums reached nearly £400 in May and June, up a third each year, according to the Association of British Insurers. With tougher conditions and higher prices introduced in the reinsurance markets, the higher bills are likely to last.

Insurers have been behind the curve on pricing since the pandemic and have been caught off guard by inflation. The UK sector generated a combined ratio of 122% in 2022, posting significant losses, according to EY. In the US, home insurers posted losses of $15 billion last year, the worst since at least 2000. Prices everywhere have skyrocketed. The consumer market is watching 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 companies such as Swiss Re, Munich Re and Hannover Re. A tightening of reinsurance terms raised the bar for payouts. Homeowner losses in recent years are the result of lower-intensity but higher-frequency events — not large hurricanes, but smaller storms. Hail damage to solar panels, say, was an acute source of losses.

Fewer large single loss events have helped the developed market reinsurance sector outperform broader insurance by 20% on a total return basis from the end of 2022. Reinsurers’ first-half results showed prices continue to remain firm . “It is difficult to see property prices falling for customers following the structural reassessment of risk at reinsurers,” says Berenberg’s Tryfonas Spyrou.

This is a market reset: effectively, reinsurers are back to providing balance sheet protection for insurers instead of earnings protection. Shareholders of mass-market home insurers also want more of the latter, so the price goes up for customers.

There is now substantial excess capital in the system, above management targets. The three European reinsurers have about 40 billion euros in excess capital, Berenberg believes. Only about a quarter of that would be consumed by a $200 billion loss event. London specialist names have racked up similar gains. The excess capital this year could amount to a tenth of the combined market value for Hiscox, Beazley and Lancashire, according to Jefferies.

Strong capital returns are expected for reinsurer shareholders, with actions likely to follow. But in the mass market, prices are still catching up with this market shift — suggesting more pain for homeowners.

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