Flooding will not sink insurers

The devastating flooding that has taken place across the country has been headline news for over a month now, although according to Fitch Ratings, while the events will be extremely costly they do not constitute a catastrophe for insurers. Moreover, they will have limited impact on insurers’ ratings.

The ratings agency says that the total cost to insurers of recent flooding in could exceed £3bn. Preliminary estimates from the Chartered Institute of Loss Adjusters predicted total losses resulting from the Yorkshire floods at £1.5bn, made up of £825m of domestic and £680m of commercial claims.

The ABI has said that total claims could exceed £2bn, including the most recent flooding in the south of the country. Fitch’s estimate of £3bn is based on expected late reporting of claims, higher than average claim amounts due to standing flood water, and claims relating to motor vehicle damage and business interruption. The worst affected areas are Yorkshire, Worcestershire, Gloucestershire, Warwickshire and Herefordshire.

The most recent comparable event occurred in 2000, when flooding cost the UK insurance industry £1.3bn. In a normal year, total weather-related claims typically reach around £0.5bn to £1bn . However, the full extent of the damage is not likely to be known for some time as flood warnings remain in place in some areas.

But, interestingly Fitch expects the flooding to have a limited rating impact on UK insurers. Fitch expects reinsurance programmes to be sufficiently strong to absorb flood losses and limit the net exposure for most UK insurance groups.

“Despite the severity of the recent flooding and the wide area affected, it is not a catastrophe of the magnitude that could impair insurers' capital strength, although it is likely to have a negative impact on earnings,” says David Stephenson, associate director in Fitch’s Insurance group.

Consequently, Fitch does not expect changes to its UK non-life ratings resulting directly from the flooding.

Unlike other European countries where government-backed schemes are in place to meet claims costs arising from flooding, cover for households and businesses in the UK is provided by the insurance industry.

Although Fitch believes the flooding may impact the premium rate environment for domestic and commercial property insurance. It is likely to result in a significant hardening of rates in the most affected areas and a general increase in premium rates in the property market as a whole.

The ABI has stated that there are around 2 million homes in the UK, or 10% of the total, that are at risk from coastal or inland flooding. Fitch notes that, in the absence of sufficient further investment in flood defences, there may be a risk of insurers reconsidering the provision of insurance against flooding in the future, particularly in areas most subject to flood risk.

For the insurance industry, the flooding is the most severe natural catastrophe in the UK since a storm in 1990 cost the sector £2.2bn.

Fitch is monitoring the likely claims exposure of individual insurers to the UK flooding and is collecting information from those that are likely to be materially affected. Should Fitch identify any insurers for which the flooding materially reduces capital strength or reveals weak risk management, this may result in isolated rating actions.