UK Insurers Face Floods Losses; May Raise Premiums

By | June 12, 2012

British insurers face big claims for flooding after the heavy rainfalls across the country this month, making it harder for them to hit profit targets and potentially forcing them to raise premium rates for consumers, analysts said on Tuesday.

Hundreds of people were evacuated in west Wales at the weekend after floods swamped caravan parks and homes, and scores more were hit by smaller inundations in parts of England, according to media reports.

More flooding is expected amid forecasts for continued rain, with 39 flood alerts in force across England and Wales as of Tuesday, Britain’s Environment Agency said.

Some insurers could miss their underwriting profit targets for the year because of a surge in flood-related claims, said Oriel Securities analyst Marcus Barnard.

“The recent rain and associated flooding are likely to lead to significant claims for UK insurers,” Barnard wrote in a note on Tuesday, estimating that the industry’s overall combined ratio of costs and claims to revenue could deteriorate by three to six percentage points.

Aviva and RSA, Britain’s biggest home insurers, have combined ratio targets of 97 percent and 95 percent respectively and insurers are likely to push through price increases for home insurance in an effort to recoup flood-related payouts.

“The overall impact of this will almost certainly be further premium rises for policyholders as insurers seek to recover the losses they have made,” said Deloitte partner Ian Clark.

Britain has been hit by several bouts of severe flooding in the last 10 years, with one outbreak in the summer of 2007 costing insurers about £3 billion ($4.66 billion).

The latest inundations come as the industry holds talks with government over ways of providing affordable insurance to homes in high-risk areas after an existing agreement between the two sides expires in June next year.

Under that deal, insurers have agreed to provide affordable cover to homes in flood-prone regions in return for a government commitment to spend billions upgrading flood defences.

The industry wants this to be replaced with a reinsurance scheme, dubbed Flood Re, which would take on some of its flood risk in return for an annual premium, and which would rely on a taxpayer-funded backstop in the event of extreme flooding.

Officials at Britain’s Department for Environment, Food and Rural Affairs and the Association of British Insurers described the talks as “constructive.”

Flood Re is modeled on Pool Re, a government-backed reinsurance scheme designed to cover commercial property insurers against terrorism-related claims.

The Association of British Insurers has warned that 200,000 homes in flood-prone regions could be left without cover if a new arrangement is not put in place by June 2013.

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