Flood Re holds hidden risk

UK retail insurers could face bigger than expected flood losses because they have inadequate data about their exposure, ratings agency Standard & Poor’s has warned.

S&P said in a report published today that flood risk presents the UK retail insurance industry with a bigger challenge than other types of natural catastrophe risk.

The key element in flood risk management is the ability to adequately quantify flood risk exposure, particularly to extreme events, S&P said. However the industry’s assessment of its exposure to extreme floods is less robust than it is for the major natural catastrophe such as storm and earthquakes.

“Data deficiency could affect flood model results materially, and to a greater extent than models for other perils,” S&P warned.

“We do not yet consider data quality to be sufficiently detailed and precise. For example, insurers may not know the exact location of each property that they insure.”

As a consequence of all these factors, insurers are at risk of inaccurately estimating their flood exposures, which could lead to higher than expected losses, the report said.

The Flood Re scheme, due to come into effect next year, will cap how much individual households in high flood risk areas pay for their home insurance. It will be funded by a levy on all UK home insurers, equivalent to around 2.2% of a policy.  

Under the agreement, the government committed to invest in flood defences. However most flood risk models exclude the growing impact of global warming, which cause more intense rainfalls and higher sea levels.

This could mean that the government’s planned investment in flood defence is inadequate.

In that scenario, Flood Re could require all home insurers to pay more into the reinsurance pool, even if they do not themselves insure properties that face a high risk of flooding, S&P said.

The ratings agency said that Flood Re would benefit the industry as long as climate change does not have an excessive impact on flood risks and that the UK government delivers on its comment to strengthen flood defence.

“If the government does not deliver adequate defences, we do not believe that Flood Re or any other insurance solution could deal with the increase in flood risk that will result from climate change,” it concluded.

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