Fitch claims risk pool is most likely solution to UK flood insurance crisis

The agency said that it believes a pool is the most likely solution to the UK’s fast-worsening flood problem despite the government’s recent refusal to provide a temporary overdraft facility to the industry’s latest proposal.

The agency warned, however, that the challenges of designing and funding a special insurance pool that also covers ‘burdensome administrative costs’ leaves the availability of flood insurance highly uncertain in the interim.

Fitch said that the expiry in June 2013 of the government and insurance industry’s Statement of Principles (SoP) agreement to provide insurance in high flood-risk areas is positive for the UK insurance industry but leaves households at risk.

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“Removing existing market distortions would improve the credit profiles of UK insurers as it would allow them to price flood-risk appropriately. However, affordable cover is not likely to be available without some form of government initiative, stated the credit rating agency. A pooling of risks, which may include a government subsidy, would ensure the availability and affordability of insurance for the minority of households whose properties are located in high-flood-risk areas. Many other countries have taken this approach to catastrophe risk,” it pointed out.

The recent increase in property values and the propensity to build in flood plains have increased risks for insurers. Fitch pointed out that higher flood-related losses incurred from the numerous flooding incidences in June, July and last weekend will contribute to a ‘deterioration of underwriting margins’ for UK non-life insurers for their full-year 2012 results.

Under the SoP, UK insurers agreed to provide flood insurance to standard households and small businesses in areas of significant flood risk in return for government action to reduce this risk to below a 1-in-75 chance of flooding within five years from July 2008. “Frustrated by the slow pace of these improvements, the Association of British Insurers (ABI) has made it clear that agreement would not be renewed,” stated Fitch.