Flood light
Much has been said about the possible adverse effects on insurance premiums in the wake of the floods that affected certain parts of the UK this summer. David Collard takes a closer look at the figures
The UK’s flood defences seemed unprepared for the volume of water that poured down on places such as Tewkesbury and areas along the upper Thames, and some commentators say that the insurance companies were also caught unawares.
The deluge of rainfall that swamped Britain has sent a flood of claims heading to the doors of insurance companies and the press has been quick to warn us of impending premium increases.
Insurer Allianz said the floods should now act as an overdue wake-up call for the industry to protect itself from the risk of flooding. “Flood in the UK, we believe, is right up there as a major risk,” the Financial Times quoted Allianz UK chairman Clement Booth as saying.
He added that insurance premiums were bound to increase country-wide in the wake of the downpour as insurance firms build up more capital to cover their costs due to household claims, alone estimated to be around £1.5 billion. Mr Booth felt it was too early to tell how much higher insurers would push household or commercial premiums in the long-term for those living or working in a flood-risk area.
Strong losses
Zurich Financial Services Group has estimated its claims payments for the floods will not exceed £128 million, while another insurer of schools, Ecclesiastical Insurance Office, has estimated its losses at around £10 million. The UK’s largest insurer Aviva – best known for Norwich Union – warned recently that it faced losses of £400 million as a direct result of the flooding in June and July.
Although not on the scale of recent hurricanes overseas, the flooding has still raised substantial costs, prompting Aviva’s and other quoted insurers’ share prices to take a dip recently as investors showed their concern over the upcoming payouts.
Improved outlook?
Despite the overall £3 billion price tag attached to the floods, the outlook for most might not be as bad as first feared, however. On the positive side, the prospects for the European and UK insurance industry continue to look stable, according to Moody’s Investors Service. In its latest outlook, it claims that the operating environment should remain supportive to rating stability in the short-term. It warns, however, that external shocks or financial markets corrections could present a challenge for the industry.
Brighter spells?
Within the reinsurance sector, similar sentiment applies, according to Fitch Ratings. Fitch has maintained its stable outlook on the global reinsurance market, provided that no major adverse event takes place. Since the beginning of the year, the ratings agency has upgraded 31 insurance and reinsurance companies, a record since 2002.
So what does all this mean for policy-holders?
Despite the heavy losses, insurers seem unlikely to impose significant rating increases on most commercial customers. The competitive environment has meant that no insurer wants to be the one to make the first move and increase rates unilaterally.
Only those people and organisations that suffered losses from the floods seem the most likely to see changes to their policies, such as increased premiums and higher flood deductibles.
Sources: Post Magazine, Moody’s Investors Services, Fitch Ratings
David Collard is a director of HSBC’s Education Practice and can be contacted at david.collard@hsbc.com
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