Flooding in the final month of 2015 will put pressure on the earnings of U.K. property insurers, according to a briefing published by A.M. Best.
Initial estimates of combined insured losses from Storm Desmond, which hit the United Kingdom on Dec. 5, 2015, and Storm Eva, which followed on Dec. 26, range from £900 million ($1.3 billion) to £1.5 billion ($2.2 billion). A.M. Best said, noting there will be further losses from Storm Frank, which brought heavy rainfall to already saturated areas of the U.K. on Dec. 29.
Economic losses are likely to be much higher, said the A.M. Best briefing titled “Flood Losses to Hit U.K. Insurers’ 2015 Earnings.”
“Historically, the frequency and severity of weather-related events, and flood risk in particular, has been the main driver of performance in the U.K. property sector,” the report explained.
A.M. Best stated that it expects insurers to withstand these losses, with a moderate impact on earnings but little effect on balance sheet strength and ratings.
“The main competitors in the U.K. insurance market tend to be well diversified by line of business and geography,” said Catherine Thomas, senior director, analytics.
“Furthermore, weather-related claims experience in the first 11 months of the year was relatively benign and the U.K. insurance market had been expecting good results for household and commercial property business for 2015,” she added.
For most insurers, losses from each of the individual storms are unlikely to exceed per event retentions before reinsurance, A.M. Best explained.
A.M. Best noted that U.K. insurers have been able to take advantage of weak conditions in the global reinsurance market to achieve favorable pricing and contract terms.
“For instance, hours clauses, which define the time period during which claims resulting from a given occurrence can be recovered as single aggregated loss, have been extended. As a consequence, insurers may be able to aggregate losses from two of the storms, so that excess of loss programs are more likely to attach,” Thomas went on to say.
These recent floods come ahead of the implementation of Flood Re in April 2016, which is a new scheme that will enable insurers to pass on the flood risk element of home insurance policies, A.M. Best said, noting that commercial properties are excluded from Flood Re.
“The non-for-profit reinsurance body will be funded through a levy on all policyholders,” the briefing explained. “It will effectively limit the cost of flood insurance for properties at the highest risk, with premiums capped at a level based on a property’s council tax band.”
“If implemented successfully, Flood Re has the potential to minimize the instability in insurance, mortgage and local housing markets that could result if comprehensive home insurance was not available to all homeowners at an affordable price,” the briefing said.
A.M. Best cautioned that the scheme will need to be combined with the management of flood risk because recent events have reignited concerns regarding the adequacy of flood defenses and whether there is an adequate level of government capital expenditure on flood prevention. These events also have highlighted “the importance of restricting building in areas prone to flooding.”
The launch of Flood Re “should support a smooth transition towards more accurate risk-based flood pricing….”
Source: A.M. Best