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Insurers expected to withstand December floods in U.K.

Posted On: Jan. 5, 2016 12:00 AM CST

Insurers expected to withstand December floods in U.K.

Losses from recent flooding in the United Kingdom will dent insurers' profits but should not have a drastic effect on their balance sheets, according to a report published Tuesday by A.M. Best Co. Inc.

And while losses from individual storm events likely will not exceed insurers' retentions, some excess-of-loss reinsurance programs may be affected because of lengthen hours clauses, Oldwick, New Jersey-based Best said in the report, “Flood Losses to Hit U.K. Insurers' 2015 Earnings.”

Combined insured loss estimates from Storm Desmond, which hit the United Kingdom on Dec. 5, and Storm Eva, which struck on Dec. 26, range from £900 million to £1.5 billion ($1.33 billion to $2.23 billion), Best said.

“There will be further losses from Storm Frank, which brought heavy rainfall to already saturated areas of the United Kingdom on Dec. 29,” Best noted.

U.K. insurers likely will withstand these losses, which will have a moderate impact on their earnings but little effect on their balance sheets and, therefore, their financial strength ratings, according to the report.

Most U.K. property insurers are well diversified, both by line of business and by geography, and the first 11 months of the year were relatively benign in terms of weather-related losses, Best said.

Property will be the class of business most affected by the recent floods, although there also will be some auto claims, Best said.

The losses likely will not affect insurers' reinsurance programs, unless they are able to aggregate losses from the storms because of extended hours contracts, according to the report.

“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.

“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,” it said.

Best noted that the floods occurred months before the slated April 2016 implementation of Flood Re, a U.K. government-backed reinsurance plan for homeowners insurance.