Flood losses: good news for rates

RSA’s UK flood loss estimate of £50m, released this morning, has put the potential industry-wide loss into perspective and shows clearly that insurers will not be dealing with another 2007.

Flooding in 2007 cost the industry around £2.5bn, and RSA in particular £120m. Its closest rival, Aviva, paid out £475m in combined claims from the 2007 flooding and January storms.

Even so, the losses show chief executives’ calls for rises in private household rates have been justified, and may pave the way for more increases.

The size of RSA’s loss has surprised some. Barrie Cornes had estimated that the insurer would be on the hook for between £8m and £15m for homeowners’ business alone, based on RSA’s market share of roughly 12% of the homeowners’ market.

While the RSA estimate covers its household, motor and commercial property books, the household portion is likely to make up the bulk of the flooding claims. This prompted Cornes to say that the first half weather cost for RSA was significantly more than we had forecast”.

They may be bigger than expected, but the industry should be able to take the losses in its stride. RSA revealed this morning that the £50m loss, coupled with £35m of Italian earthquake losses, had prompted it to revise its group-wide combined ratio estimate to better than 96% from better than 95%. Back in 2007, the £120m flooding added 2.1 points to the combined ratio, taking it to a still-profitable 94.9% – hardly cause for concern.

Based on RSA’s estimate, the industry as a whole could be looking at a £500m loss, says Shore Capital analyst Eamonn Flanagan. This assumes an 8% total UK market share for RSA and that 90% of its losses emanate from property.

While manageable, the losses could boost prices. “In our view, this should add to the upward pressure on rates across the UK property lines…a positive for RSA,” Flanagan said in a research note.

This should give industry executives some cheer, as they wrestle with stubbornly low rates and poor profitability on the commercial sides of their businesses.

GI comes under scrutiny

On the subject of price rises, the UK general insurance market looks set to be in for more scrutiny. The Financial Services Consumer Panel, which advises the FSA, has vowed to focus more of its time on the general insurance industry in the coming year.

In particular, it will be looking at any evidence of price cutting at the expense of quality, difficulties in renewing policies and increased insurance complaints.

It is good to see GI getting some attention rather than being crowded out by the life side of the business, and also recognition for playing, as panel working group chair Mike Dailly put it, a critical role in enhancing lives. But does it really need another organisation picking over its pricing practices?