​UK storms will significantly weaken 2015 household insurer earnings – Fitch

The recent UK storms will significantly weaken 2015 household insurance earnings for some firms, ratings agency Fitch has said.

But the company added that despite this, it was unlikely to affect insurers’ capital levels or ratings.

Total insured loss estimates for storms Desmond and Eva are expected to be as high as £1.5bn.

This figure will rise further when the cost of the final storm of the year, Frank, is added.

The ratings agency said the scale of insured losses would also depend on how many businesses had been affected. If there has been significant business interruption, insured losses could rise above the current estimates.

Fitch said: “We believe the flooding could increase the industry’s personal property accident year combined ratio above 100%, indicating an underwriting loss.

“But insurers are likely to use reserve releases to bolster their 2015 results and may therefore still report a profit for the year in this sector.”

“We believe premiums are starting to bottom out after a longer period of declines that has pushed them to a five-year low.

“We have previously said that a major claims event could be a catalyst for a rebound in premiums, but it is not yet clear whether the flooding claims will be big enough to spark this reversal.”

This is because there is a lot of capital flowing into the household segment as companies seek to diversify away from the highly competitive motor insurance sector, and this could be sufficient to keep pressure on premiums, Fitch added.

The storms have also raised questions about the adequacy of flood defences, after some recently installed defences failed to withstand the force of the storms.

In response, the government has pledged £40m to fix and bolster flood defences in Yorkshire and £50m to aid the local authorities’ response to the floods.

The government had previously announced £2.3bn of investment in flood defences over the next six years.

Total central government funds allocated to flood defence spending between 2012 and 2015 fell by around 20% in real terms compared with the previous four years.

Fitch warned that failure to keep up flood defence spending could lead to higher than expected claims for the UK’s Flood Re scheme.

“A long-term increase in the number of properties at significant risk of flooding could also result in Flood Re’s funds and reinsurance cover being inadequate to meet outgoings,” Fitch added.

“In that event, insurers would be required to make up the difference in the near term, but would then pass on the cost to all households through an increase in annual premiums.”