Premium rises revive insurance profits: An industry badly hit by the recession could enjoy a near-record year, writes Paul Durman

THE HUGE rises in insurance premiums imposed on car and home owners in recent years are delivering large rewards to the insurance companies. The profits recovery announced yesterday by General Accident will soon be followed by similar improvements at other leading companies.

In the first half of the year, General Accident made pre-tax profits of pounds 126.2m, compared with a pounds 15.4m loss in the same period last year. The Perth-based insurer has made a pounds 70m improvement in each of the last two quarters and looks set to make further progress in the rest of the year.

A similar picture will emerge from today's results from Commercial Union, tomorrow's from Royal Insurance and, in a few weeks, the figures from Guardian Royal Exchange and Sun Alliance.

The recovery is remarkable because it comes so soon after the depths of the industry's problems in 1990 and 1991, when total losses ran to many hundreds of millions of pounds. Only two years later, insurers have a chance of getting close to the profits they made in the record year of 1988.

This is a good demonstration of the insurance cycle. The industry has few barriers to entry. So if foreign competitors see British insurers making massive profits, it is relatively easy for them to enter the market by offering cheaper premiums.

This competition eventually drives premiums down to unrealistic levels, causing profits to fall. Insurers try to restore profits by raising premiums and some pull out of the market. Thus, rising premiums and reduced competition restore the conditions for companies to make profits. Unfortunately for the insurers, the recent cycle has been enormously accentuated by losses on catastrophe and other exceptional developments.

The European storms of 1990 cost the industry more than pounds 5bn. Several dry summers led to unprecedented subsidence claims. There was also a escalation in burglaries and car theft and a consequent increase in claims. Recession brought a rise in fire and arson claims - many of them fraudulently made by struggling businessmen, the insurers believe.

Home repossessions have also hit the insurers, which provide cover to the building societies and other lenders. The losses run into billions, most falling on Sun Alliance, Royal Insurance, Eagle Star and Legal & General.

The insurance industry responded with large hikes in premiums - 15 to 20 per cent a year or more - which are responsible for much, but not all, of this year's recovery. The mildness of last winter meant insurers suffered unusually low weather losses. Wetter weather has also restored water tables, causing subsidence losses to tumble.

Some fear the industry may soon see a return to fierce competition. Investors have injected pounds 1.5bn of new money to allow the insurers to write more business. However, the insurers and their balance sheets are still bearing the scars of the enormous losses of recent years. Many need to rebuild their finances and could not afford to take on a large amount of loss-making business again.

General Accident results, page 21