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.

A SUMMER TO REMEMBER

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions