Off-flood plain losses outstrip river and coastal floodings, say experts
The June and July floods that gripped parts of the UK could cost insurers between £2.25bn and £3.25bn in total, according to latest estimates by Risk Management Solutions (RMS), catastrophe risk management specialist.
Insured losses from the July flood are likely to be between £1bn and £1.5bn, with the estimated cost of the 25 June flood ranging from £1.25bn to £1.75bn.
These figures could be higher than many insurers expected, based on their initial estimates of the risk.
RMS' analysis of the more than 1,000 affected postcodes shows that almost 70% of the areas impacted by the July floods were in areas considered to be off the major river floodplains.
“Many insurers assess their flood risk exposure based on maps that only take account of river and coastal flooding,” commented Claire Souch, senior director of model management at RMS.
“The recent events highlight that these incomplete maps only provide part of the picture, and that flooding due to heavy rainfall in areas with inadequate drainage or from minor streams can have dire consequences.
"Those insurers that have only taken account of their risk exposure from direct river flooding could face an unexpected deluge of claims.”
Although the number of residential properties affected by the July floods – currently thought to be up to 15,000 – is much lower than the 27,500 flooded in late June, average claims are expected to be higher, as the affected properties tend to be of higher value and a greater proportion of the damage will be insured.
However, the total insured cost for commercial properties in the July floods is likely to be lower than for the June flood, as the businesses impacted were generally smaller.
Additionally, the government has set up a scheme in some areas to help small and medium-sized companies develop recovery plans so they can return to business as soon as possible, which should constrain business interruption costs.
A big factor pushing up residential and commercial property repair costs will be the inflated prices for goods and services in short supply, known as demand surge. “There is currently a shortage of drying equipment, made worse by the fact that it is still needed in areas affected by the June flood.
The recent power cuts also mean that, even when dryers have been available, they have been unusable,” said Souch.
“This results in properties remaining flooded, which increases the damage, and may also force people to find alternative accommodation. All these factors increase the costs for insurers.”
A further issue is ‘coverage expansion’, whereby insurers may need to pay out more than is covered in the issued policies.
For example, after major disasters insurers often end up meeting the total costs of people having to relocate, or paying the full amount to replace contents that may have been undervalued when a policy was taken out.
Although it is unusual to have two very intense rainfall flash floods in a short period, it is not abnormal to see flash flooding covering widespread areas with both on and off floodplain losses.