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

Start your day with The Independent, sign up for daily news emails
Have you tried new the Independent Digital Edition apps?
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

Recruitment Genius: Operations Manager / Section Manager - Airport Security

£40000 per annum: Recruitment Genius: This is a critical role within the secur...

Recruitment Genius: Sales Executive - OTE £45-55k

£20000 - £55000 per annum: Recruitment Genius: The company is an established, ...

Recruitment Genius: E-Commerce Manager - Fashion Accessories

£25000 - £30000 per annum: Recruitment Genius: This is a great opportunity for...

Recruitment Genius: Accounts Senior / Assistant Manager

Negotiable: Recruitment Genius: Exciting new position available at an independ...

Day In a Page

Syrian conflict is the world's first 'climate change war', say scientists, but it won't be the last one

Climate change key in Syrian conflict

And it will trigger more war in future
How I outwitted the Gestapo

How I outwitted the Gestapo

My life as a Jew in wartime Berlin
The nation's favourite animal revealed

The nation's favourite animal revealed

Women like cuddly creatures whilst men like creepy-crawlies
Is this the way to get young people to vote?

Getting young people to vote

From #VOTESELFISH to Bite the Ballot
Poldark star Heida Reed: 'I don't think a single bodice gets ripped'

Poldark star Heida Reed

'I don't think a single bodice gets ripped'
The difference between America and Israel? There isn’t one

The difference between America and Israel? There isn’t one

Netanyahu knows he can get away with anything in America, says Robert Fisk
Families clubbing together to build their own affordable accommodation

Do It Yourself approach to securing a new house

Community land trusts marking a new trend for taking the initiative away from developers
Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

Money, corruption and drugs

The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

150 years after it was outlawed...

... America's first slavery museum is established in Louisiana
Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all
Tony Oursler on exploring our uneasy relationship with technology with his new show

You won't believe your eyes

Tony Oursler's new show explores our uneasy relationship with technology. He's one of a growing number of artists with that preoccupation
Ian Herbert: Peter Moores must go. He should never have been brought back to fail again

Moores must go. He should never have been brought back to fail again

The England coach leaves players to find solutions - which makes you wonder where he adds value, says Ian Herbert
War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

The battle for Mosul will unleash 'a million refugees'

Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn