UK winter storms add to pressure on UK non-life insurers

Winter storms losses will maintain pressure on UK non-life insurers’ profitability but will be manageable by the industry, according to AM Best. The ratings agency currently has a negative outlook on the UK non-life insurance segment, driven in part by the volatility in property lines that exposure to weather-related events brings.

Best said it expects claims stemming from two named storms – Pia and Henk – and generally poor weather conditions in the UK over the festive period to add to pressure on earnings. The latest wave of bad weather comes after Storms Babet, Ciaran and Debi, which struck the UK in October and November, caused insured losses estimated at more than £560m by the Association of British Insurers (ABI).

The storms in early January were followed by a cold snap that is likely to have exacerbated some damage and delayed repairs, further contributing to claims bills, said Best, adding that there are also reports that rising water levels have triggered some parametric flood policies in parts of the UK.

“While ultimate losses will likely be manageable for the UK’s insurers, persistently high claims inflation, coupled with recent periods of inadequate pricing, will exacerbate the impact on bottom lines,” Best said.

The agency noted that the market tends to produce modest underwriting results in benign catastrophe years and underwriting losses in catastrophe-affected years. The three-year average accident-year combined ratio from 2020 to 2022 sits above 100%, and 2023 is expected to produce another 100%-plus result.

“Claims costs have remained stubbornly high in the face of robust inflation, driven by supply chain disruptions and a tight labour market,” said Best. “At the same time, new pricing rules for retail motor and home insurance introduced by the Financial Conduct Authority (FCA) at the beginning of 2022 made it more difficult for underwriters to increase rates to more adequate levels in an already competitive market.”

Best pointed to Flood Re, a joint initiative between the UK government and insurers, which has operated since 2016 and enables insurers to offer affordable flood cover more widely as part of home insurance policies. Best noted that Flood Re’s claims experience has been extremely volatile – reflecting the unpredictable weather conditions. Claims in 2018 totalled £8m, rising to £161m in 2020, before falling back again the following year. Claims for the last two years have been elevated at £32m in 2022, and £46m in 2023.

“But Flood Re is only meant to offer a medium-term solution: it is due to withdraw from the market in 2039, leaving commercial carriers to provide coverage thereafter,” said Best. “Were Flood Re to withdraw as intended, it is unclear whether the insurance market will have an appetite to write this business at premium rates that are affordable to consumers.”