Aviva hit with extra claims costs from cold weather snap

In a trading update the insurer revealed that its weather experience in the UK and Ireland for the full year was only marginally above the long-term average.

The provider forecast that for the full year its group combined operating ratio would come in at 94.6%.

After the announcement, at the time of writing, Aviva’s share price has risen by 3% to 454.2p.

The stock market’s reaction is in stark contrast with the response to Direct Line’s update earlier this month.

Profit warning

In a shock profit warning that knocked nearly 25% off its share price Direct Line flagged that it faced £90m of claims across home and commercial business from the December freeze citing burst pipes, water tanks and other related damage.

The insurer said it expected to deliver a COR of 102% to 103% for 2022.

Analysis indicates that Direct Line has taken a bigger hit despite having a smaller relevant book.

According to its half-year results for 2022, Direct Line had 2.57 million home insurance policies in force generating £250.4m of gross written premium.

Total adjusted GWP across all lines including the likes of commercial and motor business was £1.52bn.

In Aviva’s most recent half-year results it posted £1.2bn of UK personal lines business (along with £1.43bn of commercial lines).

Aviva did not provide a breakdown of home policies or home GWP in its results. However, analysts Globaldata previously reported that Aviva was the top insurance provider across all three home insurance product lines (contents, buildings, and combined) in 2021.

Price

In the latest update Aviva also flagged that it was continuing “to price appropriately for the high inflation environment, in particular in UK personal lines, responding at pace to emerging data and trends”.

It was a message the insurer had made clear in its half-year results when personal lines GWP dropped 1% year-on-year. Aviva said at the time that it was continuing to “maintain pricing discipline” and “responding to the impact of increasing inflation on general insurance markets”.

The financial updates from Aviva and Direct Line follow on from EY’s warning in November that home insurers are expected to make significant losses this year and next due to underlying inflationary pressures and premium rate falls.

It forecast UK home insurers would have a net combined ratio of 116% in 2022 – the worst since 2007 when the NCR was 118%.

“Contributing to what will be the most unprofitable peak in 15 years has been high inflation, a bad year for subsidence following a very dry summer, claims frequencies bouncing back post-pandemic and reduced premiums following the implementation of the FCA’s pricing reforms on 1^st January 2022,” EY stated.

However it noted that in 2023 the NCR should recover to a still loss-making 109%.

LV released figures last year that subsidence cases were up by 205% between June and July.

Brokers

As previously assessed by Insurance Age, personal lines brokers should notice the problems Direct Line faces and be interested in whether they are shared by the rest of the UK insurance market to get insight into what to expect in 2023 and what will need to be communicated to clients.

The data shows there is a strong likelihood of significant rate rises as insurers must offset increasing claims costs.

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