UK Insurers Could See Underwriting Losses After Storms Ciara, Dennis: Fitch

February 21, 2020

Losses from storms Ciara and Dennis, which brought strong winds, torrential rain and widespread flooding to the UK, will increase pressure on UK household insurers’ profits in 2020, said Fitch Ratings.

While the claims are unlikely to exceed £500 million (US$644.5 million), they could contribute to a combined ratio above 100% for 2020, or an overall underwriting loss, said Fitch in a market commentary titled “Storms Ciara and Dennis Add to Pressure on UK Insurers,” published on Feb. 19.

“Our sector outlook for the UK non-life company market was already negative, reflecting our expectation of substantial pressure on profitability driven by increased claims inflation and weak pricing for both household and motor insurance,” said the ratings agency.

Profitability is already weak after prolonged soft market pricing and increased claims inflation, which make insurers more vulnerable to the impact of large weather-related losses, explained Fitch.

“UK household insurers have been suffering from a weak pricing environment for several years due to a highly competitive market, with price rises substantially below claims inflation, which was in high single digits in 2019,” said Fitch.

The average premium for a combined household policy increased only 2% during the fourth quarter of 2019 (compared to Q4 2018), while premium for buildings insurance fell by 1%, said Fitch, quoting the Association of British Insurers.

The occurrence of two windstorms in the same week in February (Storms Ciara and Dennis) also highlights the need for insurers to address the impact of climate change on their pricing models and to assess whether their reinsurance programs are still adequate, added Fitch. “Extreme weather events like floods are likely to become more frequent and costly as a result of climate change, and many properties are likely to become more at risk of flooding and more costly to insure.”

Fitch said that flooding will become an increasingly important risk consideration for the UK insurance sector in the coming years.

Subsidized flood insurance is available in the UK via Flood Re, a scheme supported by the insurance industry through a levy paid by each insurer. However, Fitch went on to say that Flood Re is only set up to run until 2039 and does not cover homes built after 2009.

“This is to discourage building in high flood risk areas, but such building still continues, amid a shortage of alternative options, despite the lack of affordable flood insurance cover,” said Fitch, noting that this is leading to a growing insurance protection gap.

As flooding is becoming more prevalent, Fitch recommended that a long-term solution be developed to ensure that all households are able to buy affordable flood cover.

Climate change may also lead to longer droughts and a resulting increase in subsidence claims, while colder winter spells are likely to cause more bust pipes and escape-of-water claims, said Fitch.

Insurers experienced both phenomena in 2018, when the UK suffered a prolonged cold wave (known as the “Beast from the East”) as well as a long drought in the summer, both of which contributed to the sector’s worst underwriting results since 2010, noted Fitch.

Source: Fitch Ratings

Photograph: Homes are flooded on the banks of the River Severn following Storm Dennis on Feb. 19, 2020, in Worcester, England. Storm Dennis is the second named storm to bring extreme weather in a week, following Storm Ciara. Although water is residing in many places, flood warnings are still in place. Photo credit: Christopher Furlong/Getty Images.

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