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Many businesses in areas of the northern United Kingdom are facing insurance losses after a series of December storms caused widespread flooding across the region.
And though losses from the floods will not hurt the capital positions of most insurers, some will see profits decline and reinsurance programs may be affected, experts say.
Insured losses from windstorms Desmond, Eva and Frank, which hit the United Kingdom in December, will likely total about £1.3 billion ($1.89 billion), the London-based Association of British Insurers said last week.
Of the 15,000 claims received by insurers so far, about 5,000 are commercial claims, the ABI said.
Insured commercial losses from the recent storms will make up a higher proportion of the total loss than in previous floods in the United Kingdom, said Mohammad Khan, general insurance leader at PricewaterhouseCoopers L.L.P. in London.
“Traditionally, commercial lines insurance claims have made up approximately 10% to 30% of the total insured loss claim. Based on what PwC has observed in the market, commercial lines insurance claims will make up about 50% of the total insurance claims” resulting from storms Eva and Desmond alone, Mr. Khan said.
Commercial claims have increased partly because more cities and towns were hit by the recent bad weather than previous U.K. storms.
Business interruption losses likely will make up a greater proportion of the insurance bill than in previous storms, he said.
Companies that suffered losses during the storms likely will see rates increase when they renew insurance coverages during 2016, Mr. Khan said — as much as 100% in some cases.
The floods illustrate the need for buyers to be sure that their coverages suit their needs, according to the London-based U.K. risk management association Airmic Ltd.
“It is at times like this that you find out if your insurance and your contingency planning are fit for purpose. Sadly, we know from experience that some policyholders will be disappointed when they come to make their claims, and that many will not be fully covered,” Airmic CEO John Hurrell said in a statement.
“We would urge them (insurers and reinsurers) to be flexible and pragmatic, and to look favorably on customers who have bought cover in good faith — especially small businesses that might not have absorbed all the implications of the small print,” he said.
The floods have affected businesses and communities alike, said Mike Still, managing director of corporate business from the U.K. and Ireland at Marsh Ltd. in London.
Events such as these floods can go well beyond a businesses' ability to trade in the short term. They also can deter potential visitors who remember recent flooding in an area and have an emotional impact, Mr. Still said.
Companies need to take steps to manage these effects, he said.
Among steps insurance buyers can take to increase their resilience in flood events are staying informed about weather conditions; understanding their insurance policies and having all emergency contact numbers readily available; preventing water entering premises by using sand bags or other barricades; having access to pumps, window guards and other equipment, said Mr. Still.
For businesses in flood-prone areas, skipping carpets, placing electrical sockets high on walls and using waterproof plaster on low walls, among other things, can help limit potential losses and reduce insurance rates, Mr. Still said.
The recent losses will dent the profits of some U.K. insurers but should not drastically affect their balance sheets, according to rating agency A.M. Best Co. Inc.
But Oldwick, New Jersey-based Best said in a report that some excess-of-loss reinsurance programs may be affected because of lengthened hours clauses, particularly if extended hours contracts allow them to aggregate losses from the storms.
“For most insurers, losses from each of the individual storms are unlikely to exceed per-event retentions before reinsurance,” the report said. “But U.K. insurers have been able to take advantage of weak conditions in the global reinsurance market to achieve favorable pricing and contract terms,” it added, including longer hours clauses.
“Hours clauses, defining the time period during which claims resulting from a given occurrence can be recovered as a single aggregated loss, have been extended, often up to 504 hours (21 days),” the report said. “As a consequence, insurers may be able to aggregate losses from two of the storms so that excess-of-loss programs are more likely to attach.”
Personal lines insurer Direct Line Insurance Group P.L.C. said its total claims from the three storms would likely be between £110 million and £140 million ($159.7 million and $203.3 million), with commercial claims making up about £30 million to £40 million ($43.6 million to $58.1 million) of that.
“The group's per-event retention under its property catastrophe reinsurance contract is £150 million ($217.8 million), and therefore the group does not currently expect to make any recovery under this contract,” Direct Line said in a statement.
“For the avoidance of doubt, the group can aggregate claims incurred over a 504-hour (21-day) period to assess whether a reinsurance recovery can be made. Furthermore, the group's commercial division has a retention of £4 million ($5.8 million) for individual property risks,” it added.