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Sarah Veysey

Insurance losses from severe floods in U.K. could hit $2.5 billion

Losses come after unusually wet winter

March 2, 2014 - 6:00am

Volunteers used a pontoon to save a car from floodwaters last week in Somerset, England, where record-setting rain has fallen this winter.

Volunteers used a pontoon to save a car from floodwaters last week in Somerset, England, where record-setting rain has fallen this winter.


As floodwaters began to recede across the United Kingdom, insurers counted the cost of heavy rainfall while business groups called on insurers and the government to invest more in flood risk management and disaster plans.

Windstorms and heavy rain in late December and early January caused severe flooding in many areas of the United Kingdom, followed by heavy rain through much of January and February.

According to the Met Office, the U.K.'s national weather service, the U.K. has had its wettest winter since national series records began in 1910 as well as its wettest winter in its England and Wales precipitation series going back to 1766.

Flooding was particularly severe in areas of southern England, forcing evacuations, affecting large swathes of agricultural land and resulting in severe transportation disruptions.

While the full cost of the flooding is not yet known, analysts at Credit Suisse Group A.G. said the cost to the insurance industry could reach $2 billion.

Experts at Bank of America Merrill Lynch said insured losses likely will be lower than the estimated 3 billion ($4.99 billion) that resulted from severe flooding in 2007, and the insurance industry could face losses up to 1.5 billion ($2.49 billion) in the latest flooding. Deloitte L.L.P. also projected insured losses loss of $2.49 billion.

The Association of British Insurers said severe weather between Dec. 23 and Jan. 8 likely would result in insured losses of about 426 million ($708.1 million).

Since Dec. 23, the industry has paid out about 14 million ($23.3 million) in emergency payments to policyholders. The London-based association had not released estimates for subsequent bad weather.

Still, the London office of rating agency Standard & Poor's Corp. said it did not expect continued flooding in southern England to threaten the financial strength ratings of U.K. insurers.

The rating agency said even if losses were at the higher end of predictions, those due to flooding would represent “an earnings event rather than a capital event” for U.K. insurers.

“Even if political pressure were to hinder insurers from recovering the full extent of their flood losses through raising premiums, we would not expect it to change our assessment of the U.K. nonlife sector's industry and country risk,” S&P said.

While much of insured losses will stem from personal lines claims, some large commercial property losses and business interruption claims are likely, sources say.

According to Boston-based catastrophe modeler AIR Worldwide, while most commercial U.K buildings are built to strict standards and have sophisticated flood defenses, “post-disaster surveys indicate that low-rise commercial wood frame and masonry buildings are generally nonengineered and have vulnerabilities similar to those of their residential counterparts.”

Although it is too early to assess the extent of business interruption losses, insurers have factored such losses in setting rates for the coverage, said Catherine Barton, a partner at Ernst & Young Global Ltd. in London.

But it remains to be seen how quickly businesses can recover from the recent flooding, she said, and many likely will seek more comprehensive business interruption coverage in the future.

The financial impact of the flooding may be felt for two to three years, said Justin Balcombe, London-based U.K. head of general insurance consulting at KPMG L.L.P., because of the volume of water and sewage as well as damage to agriculture and infrastructure.

This may mean that conventional business interruption and homeowners coverage may not be sufficient to redress the losses, he said.

While business groups welcomed a 10 million ($16.6 million) pledge from the U.K. government to help businesses recover from the floods, they called on the government to consider enabling small business to access insurance coverage through the Flood Re plan, funded by the insurance industry and backed by the government, that is slated to begin operations next year (see related story).

The Federation of Small Businesses said the government should include small business in the Flood Re plan.

Meanwhile, the Institution of Civil Engineers called on the government to increase its spending on flood defenses and commit to a longer-term project on flood risk management that would extend beyond the current five-year plan.

 



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