A damp reminder of 2013's challenges

The UK insurance industry faces another welter of flood claims at the end of a year that has been dominated by flood-related news.

The Midlands, south-west England, Wales and Scotland are braced for more flooding over Christmas after being hit over the weekend following heavy rainfall.

The most recent flooding adds to a series of events throughout 2012. The UK was hit by flooding in early January, in summer (which cost £500m), and also November. The expected size of the year’s total losses, which accounting firm PwC puts at £1bn, may not be as headline-grabbing at 2007’s £3bn bill, but it will still hurt insurers.

The industry will take the flood losses in its stride as companies are generally well capitalised and financially sound. The events may even provide the industry with a good reason to further boost home and motor insurance rates.

But fourth-quarter and full-year 2012 results may not be as good as insurers were hoping or expecting. Those sailing close to the wind on their underwriting profitability may now be pushed into loss.

Also, the floods have come at a difficult time. Leaving aside the inconvenience put on the staff of insurers, brokers and loss adjusters as they are called back in to deal with claims over the Christmas and New Year period, now is the time when insurers are putting the finishing touches to the reinsurance programmes that will protect them for the following year.

If losses for the floods are significant, this could throw a spanner in the works, making for a late reinsurance renewals.

Perhaps more importantly, though, the most recent flooding is another stark reminder that the industry and government desperately need to hammer out a replacement for the soon-to-expire Statement of Principles, under which insurers agree to cover the most flood-prone homes at a discount in return for government spending on flood defences.

Talks between the government and the ABI over the replacement agreement broke down in November. While there have been whispers that the ABI has since re-engaged with Oliver Letwin, the cabinet minister in charge of negotiating with the industry on flood insurance, the estimated 200,000 most-at-risk households need more than just talk from both sides.

Perhaps 2013 will bring more hope, but it is looking increasingly like the industry will have to find its own solution.