Blog: HNW household rates – a false sense of security?

Derrick Potton, of Hiscox, calls for market wide correction to artificially low high net worth household rates.

The stars have aligned over the past decade to keep household rates in the high net worth sector artificially low. Despite rising costs, prices have remained fairly stable, but this doesn’t reflect what’s really happening in the market and it’s not a situation that’s sustainable in the long run.

For years consumers have been encouraged to shop around and seek out lower premiums with great support from both the media and even regulators. The high net worth sector has to some extent been shielded from this thanks to a less price sensitive customer who is perhaps more concerned with the quality of the product.

But as households of all wealth levels continue to feel the squeeze, even the most loyal of high net worth customers are starting to scrutinise their premiums as they increasingly look for opportunities to strip out unnecessary outgoings.  

Weather
The absence of significant weather events over the past few years in the UK has also helped to mask the issue.

Many insurers have borrowed from reserves that should be safeguarded for extreme weather claims because there simply haven’t been that many.

This may sound sensible but in practice, when the next severe weather event occurs – and it’s only a matter of time – these insurers will have no choice but to implement much steeper, ‘knee-jerk’ price rises that even the most accommodating of customers will find hard to accept.

It’s not just customers that struggle with rate rises however. This can be quite a difficult prospect for many brokers and even underwriters, as a market-wide correction hasn’t truly been seen in around a decade.

Old hands may have witnessed this cycle in previous years but for many insurance professionals at the coal face this is new territory. In the context of a modest inflationary environment it can feel counterintuitive and unjust. 

Costs
The stars have also aligned to drive costs up. In any downturn, or fallout from a downturn, claims volumes start to creep up as consumers claim for losses that they may previously have self-funded..

To add to this, renovation trends have significantly bumped up replacement costs. Open plan living, for example, has removed many of the walls and partitions that previously helped to minimise the spread of escaped water or fire.

Similarly, many homeowners have invested in high-spec integrated bathrooms and wet rooms which are more costly, difficult and time-consuming to repair.

Rising costs aren’t confined to the home either; with many customers carrying multiple devices in their handbag, or on their person, the value of personal possessions being claimed for outside of the home is also on the up. 

Future?
A market correction is both necessary and inevitable, but how insurers approach this is critical. A steady increase in rates that happens gradually over time is far more manageable for both brokers and the end customer than a sudden spike out of necessity.

Current rates have created a false sense of security so a modest market correction would be in everyone’s best interests.  

Derrick Potton is sales Director at Hiscox UK and Ireland.