Home insurance hits rock bottom

The average price paid for home insurance has fallen to its lowest levels in at least a decade, according to the Association of British Insurers (Joe Giddens/PA) (PA Archive)

The price war in the home insurance market has provided millions of homeowners with an excellent opportunity to cut their premiums by up to 20 per cent over the past 12 months.

Intense competition from a growing tribe of direct telephone insurance companies and a fall in property-related crime has forced the building societies - the traditional source of cover for millions of mortgage holders - to retaliate.

But there are signs that premium rates for home and contents cover could soon hit bottom as the fight for market share takes its toll.

Mark Wood, managing director at AA Insurance, said: ``These lower rates are based on aggressive marketing, not underwriting principles.

"Customers should expect to see at least one major direct writer withdraw from the market this year. When this happens it will be the signal to the other direct insurers that they can increase their premiums to more profitable rates."

Any fallout in the market will certainly be welcomed by the building societies, which have been accustomed to charging anything up to 30 per cent in commission.

Research by Direct Line, the country's largest direct insurer, showed that in 1993 up to 50 per cent of building societies' profits were attributable to commission on sales of insurance products.

Customers who take out home insurance through a lender can expect to pay an average of £3,000 in commission during their lifetime, equivalent to 1p on the standard rate of income tax, it said.

Philip da Silva, sales and marketing manager at Premium Search, a new telephone-based broking service, said about 40 per cent of buyers now shop around for their home insurance compared with just 10 per cent a few years ago.

"There is no doubt that a traditional willingness to stick with the existing policy provider, usually the mortgage lender, is changing. Borrowers are finding that if they shop around they can get much cheaper cover," he said.

Premium Search specialises in mixing and matching packages from different panels of providers to offer cheaper insurance. It says if it cannot arrange combined building and contents cover that is £50 cheaper than the next best offer then it will refund the difference. Premium Search pays out directly on claims, while dealing with the companies on behalf of clients.

The price war has hurt the building societies. Halifax, the country's largest lender, has 1.4 million policyholders. Earlier this year it reduced prices on buildings cover by an average of 20 per cent across all postal areas. A Halifax spokeswoman said: "Even though there is a price war, we retain the vast majority of our customers on renewal. The price cut was designed to increase that retention rate."

Other insurers are following suit. Last month, Prudential said that a redrawing of its postal codes meant it could drop the cost of its buildings insurance products by about 30 per cent in some areas. However, in most cases the reduction was far smaller, averaging less than 10 per cent.

Unfortunately, many people have been unable to take advantage of the price war. In the past few years, there has been a massive escalation of "tied in"deals from lenders.

Typically, a discounted mortgage is offered to borrowers only on condition that they take out some form of insurance from the lender. Ten years ago this form of lending was virtually unknown. By 1993, more than half of mortgages sold involved tied-in deals.

The Office of Fair Trading has ruled that tied-in deals are anti-competitive and restrict consumer choice. But many lenders get around the ruling by offering a range of mortgage deals. Borrowers are not required to take out insurance cover - but if they decide against they do not qualify for the best rates.

It is possible to get out of such deals. But some societies charge an annual fee for "administering"contracts from outside insurers. Direct Line offers to repay this administration fee, up to a value of £25, to customers who want to switch.

Other lenders, including Halifax, have decided that it is not worth their while to antagonise borrowers. It does not make buying an insurance product obligatory for any mortgage, nor does it charge an administration fee.

London E18, three-bedroom semi, rebuilding value of £165,000

insured persons aged 35 and 34, contents cover of £25,000.

Company Buildings Contents

Premium Search £189.59 £175.52

Direct Line £303.00 £250.00

Sun Alliance

(direct insurance arm) £415.28 £160.21

Halifax £440.23 £219.00

Manchester M20, three-bedroom semi, rebuilding value of

£70,000, insured persons both 65, contents cover of £20,000.

Company Buildings Contents

Premium Search £65.55 £147.14

Direct Line £95.00 £188.00

Sun Alliance £118.55 £223.76

Halifax £135.64 £219.00

Further discounts may be available on contents cover for increased

security measures such as special locks, burglar alarms or

Neighbourhood Watch Schemes.