UK floods to cost in excess of $1bn and hit insurer earnings

However, while large, the loss is only expected to temper rate reductions, although it could dent earnings in what has been an otherwise benign loss environment, ratings agencies say. A series of storms battered northern England, Scotland and Ireland in December and into the new year, causing major flooding in Lancashire, Cumbria and Northumberland. Two storms in December—Eva and Desmond—resulted in record rainfall. The country’s Met Office confirmed that December was the wettest of any calendar month since 1910, and the worst December since records began. The cost of the storms to insurers is expected to be large, but remains uncertain. To date, none of the catastrophe modelling firms have published a modelled estimate for any of the storms, although the Association of British Insurers said that Storm Desmond alone would cost its members £520m. This week, PricewaterhouseCoopers (PwC) predicted that the floods could cost insurers between £900m and £1.2bn, with a total economic cost of £1.6bn—£2.3bn. That estimate was for storms Eva and Desmond, and does not include the latest storm to hit the UK, Storm Frank, which struck in January. The total economic loss caused by the three UK storms may well exceed £3bn, PwC said. Ratings agency Fitch warned that business interruption claims could see insured losses rise above current estimates. Insurers also face a large bill for adverse weather in the US in December, where unseasonal tornadoes caused some 40 deaths. Combined, US and UK storms in December are expected to cost in excess of $4bn, according to Aon Benfield.hideOne feature of the recent UK floods has been the prominence of commercial damage, which is expected to drive insured losses, according to PwC. According to Mohammad Khan, general insurance leader at the consultant and accounting firm, the storms generated an unusually high number of commercial insurance claims because the floods hit city centres—Manchester, Leeds and York all suffered flooding. “Traditionally, commercial lines insurance claims have made up approximately 10%-30% of the total insured loss claim. Based on what PwC has observed in the market, commercial lines insurance claims will make up about 50% of the total insurance claims,” he said. December’s storms are also thought to have generated a far greater proportion of non-insured losses than past events. Non-insured losses typically account for 15%-35% of UK economic flood losses, but damage to infrastructure and small and medium-sized businesses could see non-insured losses of 35%-50% for storms Eva and Desmond—about £700m-£1.1bn. With losses in the range of £900m-£1.5bn for the two December storms, insurers’ 2015 profits are under pressure, according to AM Best. The ratings agency expects the storms to have a ‘moderate’ impact on UK insurers’ earnings, but with little effect on balance sheet strength. Like AM Best, Fitch Ratings also sees earnings implications for UK insurers from the floods. It believes the flooding could push the industry's personal property accident year combined ratio above 100%. But insurers are likely to use reserve releases to bolster their 2015 results and may therefore still report a profit for the year in this sector, it said in a statement published on Wednesday. Up until the storms in December, UK insurers had enjoyed a benign year for large losses, and had expected good results for 2015, AM Best said in its briefing note. Good performance has resulted in increased competition, putting rates under pressure, it added. However, the pace of rate reductions has slowed over the past year, and recent flood losses mean that this slowdown is likely to continue in 2016, AM Best said. Fitch also predicted that the flood losses could potentially impact premium rates: “We believe premiums are starting to bottom out after a longer period of declines that has pushed them to a five-year low. We have previously said that a major claims event could be a catalyst for a rebound in premiums, but it is not yet clear whether the flooding claims will be big enough to spark this reversal,” it said. From April 2016, UK insurers will be shielded to some extent by future flood losses with the introduction of a new flood insurance pool, Flood Re. Flood Re, which is funded by a compulsory levy on home insurance policies, will effectively pass on residential flood risk to the not-for-profit reinsurer. However, the pool does not cover commercial flood exposures. According to AM Best and Fitch, the recent flooding has reignited concerns over the adequacy of UK flood defences and government spending on flood mitigation, with implications for the potential success of the new flood pool. The government says it will invest £2.3bn in flood defences over the next six years, an increase on the £1.5bn spent between 2005 and 2010. In light of recent events, the Department for Environment, Food and Rural Affairs has launched a national review of flood defences, which includes a fresh look at how the government assesses flood risk given the threat of climate change. Despite the reassessment of defence plans Fitch does not expect the government's spending on flood defences to return to its 2010-2011 peak. Central government funds allocated to flood defence spending in 2012-2015 fell by around 20% in real terms compared to the previous four years, it said. Failure to keep up flood defence spending could lead to higher-than-expected claims for the UK's Flood Re scheme, which could result in Flood Re's funds and reinsurance cover being inadequate to meet outgoings, Fitch said.

UK floods to cost in excess of $1bn and hit insurer earnings

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