Leading Article: Crime's rising costs begins to hit home

WHEN a financial institution raises its prices sharply, customers tend to be suspicious. Their suspicion is understandable when the product is house insurance, purveyors of which can simultaneously increase prices and bring customers flooding in with scare stories of the disasters that will follow if they do not buy. Yet the 26 per cent increase in Abbey National's house-contents premiums is, in fact, rather modest.

Recorded losses from household burglaries in Britain have almost tripled in the past three years, and other insurers have been lifting prices to cover the cost of the crime wave. The Abbey (which is not itself an insurer but sells on behalf of three big insurance companies) kept its prices constant for the two years until last December, and earnt a 'Best Buy' award from Which? magazine as a result. Few of its customers, however, will write to thank the bank for delaying its price increases for so long.

Rising premiums are a sign that the market for house insurance is working as markets should. Competition at the close of the Eighties was intense: in an attempt to match each other's bargain premiums, the country's 10 big non-life insurers lost money by the bucket. In 1992, not one broke even on its underwriting business alone; only profits on invested premiums allowed some to stay in the black. They are now having to look more to their shareholders than to their customers. As premiums have begun to rise, so have profits. As a result, the share prices of the big firms have made striking recoveries: shares in Royal Insurance, which could not find buyers a year ago at pounds 1.25, are being snapped up at pounds 3 apiece.

Not all the premium increases result from rising household crime. Like other policy holders, people who insure their houses are having to pay for mistakes made by firms that offered cheap mortgage-indemnity insurance to banks and building societies. For decades, this type of cover (in which the insurer undertakes to bail out the mortgage lender if he has to repossess a house and sell it at a loss) was a risk-free money-maker. When house prices began to fall at the turn of the decade, it became clear that insurers would have to pick up billions of pounds in claims. They have passed on the pain to their customers.

This might be more acceptable if commissions in household insurance were more transparent. Yet despite its bargain prices, few of the Abbey National's customers were aware that 30 per cent of their premiums stuck to its paws as pure commission, while smaller high-street insurance brokers receive 10 or 15 per cent for the same paperwork. In theory, insurance agents are supposed to reveal their commissions if asked; practice suggests that few do.

In the end, the price of insurance must be determined by the number of burglaries (and undetected fraudulent claims). Those facing much higher bills this year should console themselves with this thought: if a few hundred pounds extra in premiums - rather than a direct encounter with a mugger or rapist - is the only way in which rising criminality has affected them, they have escaped lightly.