UK: Insurance Market Update: The Deloitte View For Non-Life Insurers - January 2013

Welcome to the January edition of the Insurance Market Update in which we focus upon issues in the general insurance industry.

In this issue, we look at the weather. James Rakow draws on information presented in our recent seminar on the domestic household insurance market and summarises how recent years have been affected by adverse weather and the impact on insurers. We look at how 2012 fared in the aftermath of the flood losses following the hosepipe bans and consider scenarios for 2013 given current concerns over flood and water perils coupled with the imminent expiry of the ABI and Government agreement on the Statement of Principles on the provision of flood insurance.

As always we look forward to receiving your feedback: your views, comments and suggestions for future themes or topics are most welcome.


Last year was memorable – not only for the Olympic Games, but also for the weather. The summer was the wettest for 100 years and every month from April to December saw above average rainfall.

Whilst most of 2012 was wet it didn't start that way. The first three months of 2012 were dry with some counties in southern England seeing their driest ever February. This led to the subsequent introduction of widespread hosepipe bans in April 2012. So within the space of a few months, insurers' attention moved from drought to deluge – the prospect of a subsidence event year quickly became the actuality of a flood event year.

It began when the wettest June in more than a century prompted the Environment Agency to issue almost 50 flood warnings. Insurers' losses during that month amounted to £17 million a day, the highest daily cost since the 2007 summer floods.

According to the Association of British Insurers (ABI), losses for last year's summer floods and storms are estimated at around £500 million with over 68,000 customers having been affected. Some of the UK's largest insurers, it has been confirmed, were hit with losses across all business lines greater than £50 million.

Recent past – freeze, storm, wind and flood

From 2010 through to 2012 there has been a sequence of record-breaking weather events that have troubled insurers and policyholders alike.

In late 2010, the UK experienced an unusually early spell of snow and freezing temperatures; Across the UK it was the coldest December in the last 100 years.

In the first few days of 2012 there were high winds with Edinburgh being hit by maximum gust speeds of 89 knots making this the most significant storm seen in Southern Scotland since 1998.

Whilst it can't all be attributed to this wind storm, household insurers paid out an additional £75 million in storm claims in the first quarter of 2012 compared with the average level of first quarter claims incurred in the previous 3 years. The GBP billions of losses experienced by the insurance industry in the windstorms of 1987 and 1990 could be used as an indicator of the scale of damage and loss that would have been suffered if the maximum gusts seen in Scotland had occurred 400 miles to the south.

In 2007, the industry lost 20p for every £1 of premium as a result of that year's summer floods. That was followed by two years of benign conditions and the industry returned to a healthy position and largely recouped those losses and then 2010 looked on course to be another profitable year until the December cold snap.

In 2011, the weather was more benign than in 2010 and, as we predicted last year, household insurers declared an underwriting profit at levels similar to those for 2008 and 2009. In fact, 2011 delivered the best underwriting result for the household insurance market since 1994 – approximately 10p of profit for every £1 of premium.

In 2012, the flood claims have not been as bad as those experienced in 2007 when 17,000 properties were flooded in Hull alone. So, in spite of the record breaking wet summer and its associated flood claims, we expect many household insurers to make a profit in 2012.

However, making forecasts of the results for the industry in 2013 is about as easy as making long-range weather forecasts! The best that can be done is to consider some scenarios.

Scenarios for 2013

A survey carried out for our Household Insurance Seminar held in December 2012 asked market participants for their views on how much household insurance premiums will increase in 2013. On average the increase expected for buildings insurance was 5% and contents insurance was 4%. Both of these survey results were two percentage points lower than the corresponding survey in 2011. If 2013 is a benign year for weather related claims, this level of increase should be sufficient for the industry to post a profit in 2013 close to the levels seen in 2011.

The forecast is not as bright if the weather, either in the form of flood, freeze or windstorm produces catastrophic losses for the industry. An event of a similar size to the floods in 2007 could push the industry close to a net combined ratio of 120%, utilising some of the capital resources set aside for such events. When we surveyed the market participants at our Household Insurance Seminar asking them what are the biggest issues facing household insurers, flood and the Statement of Principles on the provision of flood insurance came top of list.

2013 will see the end of the Statement of Principles on the provision of flood insurance

Flood insurance in the UK has historically been widely available, provided in accordance with the ABI's agreement with the Government, 'The Statement of Principles on the provision of flood insurance'. The Statement binds insurers to offer flood insurance to homes and small businesses where the risk of flooding is lower than a 1 in 75-year event. Further the agreement states that if the likelihood of flooding is judged to be higher than a 1 in 75-year event, cover will be provided if improved defences, which are believed to be able to reduce the risk of flooding to a 1 in 75-year event (or lower) within 5 years, are planned.

Insurers are, under the terms of the agreement, free to set premium and excess levels but these will be offered in a competitive market; consequently in the past, many homeowners in flood risk areas have been able to obtain insurance at an affordable premium. The agreement has ensured that home insurance has continued to be available to those homeowners living in areas with a high risk of flood.

This agreement however is due to expire on 30 June 2013 and it seems unlikely that insurers will agree to a further extension of the agreement in its current form.

At the time of the agreement, insurers believed that the Government would provide significant funding for flood defence. Government spending on Britain's flood defences fell from £664 million in 2010/11 to £573 million in 2011/2012. However, in its recent Autumn Statement the Government confirmed £120 million of additional funding over the current spending review period to building new flood defences.

A number of solutions to replace the Statement of Principles have been put forward, including the ABI's industry not-for-profit flood insurance fund. The ABI's proposals are designed to ensure that the 200,000 properties in the UK with highest risk of flooding, could retain access to affordable flood insurance over the long term. There would be a small levy on insurance policies, reflecting the level of existing price cross- subsidy between low risk and high risk households together with a temporary overdraft facility available from the Government to cover the risk of a major flood in the first few years of its operation, which could be paid back as the scheme progressed.

The latest media reports indicate that discussions are still ongoing between the ABI and Government but currently no agreement has been announced.

Flood was front page news in 2007 and 2012. Regardless of what the weather is in 2013 it is certain to be in the headlines again as we proceed towards the date at which the current agreement will expire. Whatever the arrangement that is eventually put in place, insurers will have to consider whether their flood risk data and models are detailed enough to make effective pricing and underwriting decisions. If a new deal is not in place by 30 June 2013, consumers in high risk flood areas will face new challenges when their household insurance policies come up for renewal.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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