Insurers’ profits braced for hit after UK floods

Insurance company profits are braced to take a hit from the cost of the flooding across northern England.

The flooding caused by Storm Eva, which swept northern England over the Christmas weekend, and Storm Desmond, which hit Cumbria and Lancashire earlier in December, could wipe up to 0.2% off the UK’s economic output this year, according to consultancy group IHS.

The final cost of the winter flooding will exceed £5 billion, experts at KPMG have warned.

“The scale of the flooding over the last few weeks has seen communities across large sections of Northern England, Wales, Scotland and Ireland severely impacted,” says Justin Balcombe, KPMG’s UK head of general insurance management consulting.

“In 2007 when a similar pattern of flooding hit, total insured claims were £3.2 billion, however, we consider that the actual financial impact far exceeded this. We are assessing this month’s events through a number of economic lenses, resulting in an initial total cost estimate of £5-£5.8 billion.”

The accountancy firm says the costs of re-building infrastructure and flood defences will reach £2.75 billion. It is warning that many businesses will have insufficient cover for the damage and losses incurred.

“We believe that there is a serious level of underinsurance and would estimate this economic impact to be as significant as the insured event, to the tune of an additional £1 billion,” says Balcombe.

York is among the northern cities hit by the flooding

Source: Shutterstock

Another accountancy firm, PwC, estimates the economic loss from the floods could be between £900.0 million and £1.3 billion, with insurers bearing up to £1.0 billion of that.

It says costs could breach £1.5 billion if further rainfall causes more floods.

“It is still early to estimate losses but, based on the areas where significant rain has fallen, the great number of roads submerged and including the losses arising from Storm Desmond earlier this month, we would give a very initial estimate of economic losses of between £900 million and £1.3 billion, with the insurance industry bearing between £700 million to £1 billion of this,” says Mohammad Khan, general insurance leader at PwC.

Many areas that were affected during Storm Desmond have been flooded again. A fresh storm, named Frank is expected to arrive on Tuesday evening and threatens more parts of the UK.

“If rain continues to fall in large quantities, and the areas with warnings in place do indeed flood significantly, it could well be that the total economic losses could breach £1.5 billion with an additional significant increase in insurer losses from our initial estimate,” writes PwC’s Khan.

He says profits for insurers and commercial property firms are at risk. “The insurance losses that arose from the flooding and storm damage during Storm Desmond were severe but were within nearly all affected insurers’ large loss expectations for 2015, as 2015 was such a benign year prior to the December weather,” he says.

“The additional damage from Storm Eva and any further damage caused by additional rain will impact relevant insurers’ year-end profitability. It is too early to say whether it causes the 2015 profitability of the household and commercial property business they write to be loss-making.”

In the first trading day since the floods hit, insurance company Aviva is down 0.5% at 516.65 pence. RSA Insurance Group is down 1.6% at 423.90 pence.

Analysts have said house building stocks are holding up on the potential windfalls from repairing damaged homes.

First published here: http://news.markets/uncategorised/insurers-profits-braced-for-7426/