Flood Re claims to grow as defence spending falls
Flood Re, the UK Government’s scheme to pool flood risk, may face higher-than-expected claims in the future, as spending on flood defences fails to meet requirements says Fitch Ratings.
The rating agency says that under new funding arrangements, future central government expenditure on flood defences, which forms part of the joint understanding on which Flood Re is based, will remain below the 2010-2011 peak in real terms until at least 2020-2021, which could push up buildings and contents insurance premiums for all UK households in the long term and expose insurers to additional risk in the short term.
According to Fitch, central government funds allocated for flood defence spending fell 6 percent in FY12-FY15 compared with the previous four years, representing a real-terms cut of around 20 percent.
The level of funds provided through local investment, designed to offset some of the planned reduction, remains uncertain.
“A longer-term reduction in spending could increase the number of properties in England at significant risk of flooding. A study by the Committee on Climate Change estimated that spending would need to increase by around £20 million a year on top of inflation through 2035 just to keep the number of significant-risk properties steady,” said Fitch.
“This could mean that Flood Re's funds and reinsurance cover may prove inadequate to meet outgoings. In that situation, insurers would be required to make up the difference in the near term, but would then pass on the cost to households through an increase in the annual premiums.”
The Association of British Insurers' latest claims estimate of £1.1 billion from the 2013-2014 winter storms and floods is manageable for the sector, but would have been much higher if flooding had hit more highly populated areas.
Fitch believes the storms are likely to increase the sector's combined ratio by around 3.4 percentage points. The negative impact on insurers' earnings will therefore be limited and will probably be further reduced by future price increases.
