Floods will damage UK insurers’ 2015 earnings
Flooding in the final month of the year will put pressure on the 2015 earnings of UK property insurers, according to rating firm AM Best.
According to the firm, initial estimates of combined insured losses from Storm Desmond, which hit the UK on December 5, 2015, and Storm Eva, which followed on December 26, range from £900 million to £1.5 billion.
There will be further losses from Storm Frank, which brought heavy rainfall to already saturated areas of the UK on December 29.
Economic losses are likely to be much higher, according to AM Best. The firm said it expects insurers to withstand these losses, with a moderate impact on earnings but little effect on balance sheet strength and hence ratings. It said the principal competitors tend to be well-diversified by line of business and geography.
Weather-claims experience in the first 11 months of the year was relatively benign, according to the report, and the UK insurance market had been expecting good 2015 results for household and commercial property business.
For 2014, the combined ratio for the property sector was 93 percent, including the positive impact of prior-year reserve movements.
Property is the principal line of business affected by the floods, according to AM Best, although there are also motor losses.
“Recent performance in the property sector compares well to that of the other major non-life insurance lines in the UK, with technical profits reported in each year since 2010,” said AM Best.
“But good performance has attracted competition and prices have fallen over the past few years. Rate deterioration continued through 2015, albeit at a slower pace than in the previous year.”
AM Best said it expects the slowdown in price reductions to continue through 2016, in part due to recent loss experience. However, intense competition will hamper positive rate movement, according to the firm.
“For most insurers, losses from each of the individual storms are unlikely to exceed per event retentions before reinsurance,” it said.
“But UK insurers have been able to take advantage of weak conditions in the global reinsurance market to achieve favourable pricing and contract terms. Hours clauses, defining the time period during which claims resulting from a given occurrence can be recovered as a single aggregated loss, have been extended, often up to 504 hours (21 days).
“As a consequence, insurers may be able to aggregate losses from two of the storms, so that excess of loss programmes are more likely to attach.”
The recent flooding comes ahead of the implementation of Flood Re in April 2016, a new scheme that will enable insurers to pass on the flood risk element of home insurance policies.
The not-for profit reinsurance body will be funded through a levy on all policyholders. 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. Commercial property will not be covered by the scheme.
