Heavy rainfall and flooding in UK to result in hefty re/insurance losses

by Artemis on July 9, 2012

While the U.S. east coast has been experiencing temperatures much higher than normal, severe storms have caused damage in Virginia, wildfires raged in Colorado and drought struck other areas of the U.S., the UK has been experiencing the wettest start to summer in many years. Breaking climate records seems to be a regular thing around the world these days, we’ve had the warmest winter and spring on record in some parts of the U.S. and Europe and now the UK has seen the wettest June on record and the rainfall has continued into July.

The Association of British Insurers (ABI) have said today that the current spell of extreme rainfall and associated flooding in the UK is the most severe seen since 2007. After a record rainfall month on June the ground across the UK has been soaked and rainfall levels as high as a months worth have been seen in less than a day in many areas in early July which has resulted in widespread flooding on a scale not seen for a number of years.

The flooding experienced in the UK in the summer of 2007 resulted in insurance claims of around £3 billion once all claims were tallied. It is early days to estimate the claims from the current spell of severe rain and floods but the ABI says they expect something in the low hundred of millions, although that is likely to raise as waters recede and claims are filed. Further heavy rainfall is expected over the coming days and weeks in the UK with the jet stream being blamed for the less than summer-like conditions, that could lead to further flood losses in July. It’s expected that these losses will hit the reinsurance sector as they will breach retention levels for insurers

Once again UK flooding hits the headlines and is expected to create a sizeable loss for the re/insurance industry. It’s estimated that a major flood event in the UK could cost the reinsurance sector over £10 billion, with some estimates much higher than that. With the advances being made in risk modelling, flood and rainfall measurement and initiatives such as PERILS AG’s inclusion of UK flood loss data, we continue to think it likely that we’ll see our first UK flood catastrophe bond within the next year or two.

Flood damage and insured losses are not the only impact of the heavy rainfall and less than summer-like conditions the UK has been experiencing. The weather is beginning to hit businesses across the UK, particular in sectors such as tourism and retail, and the issue of weather risk hedging and management is being raised in the national press once again. The BBC discusses the impacts of wet weather and flooding on businesses in the UK here and it seems that on top of coping with a continuing economic downturn the UK’s business sectors are feeling the weather risk this year.

Tourism and outdoor events such as festivals are being hit hard along with retailers who rely on sales of summer items such as clothing, garden items and camping gear. Normally wet weather sales impacts can be recovered when the weather improves again but this year the UK has seen such consistently bad weather in June and July that analysts expect many retailers will be hit hard.

Interestingly the BBC article suggests that weather derivatives are too complex and expensive for many retailers to use. This should be noted by the weather risk management sector and insurers as there are real opportunities to find ways to provide weather hedging to businesses exposed to weather extremes. We’ve written about examples of retailers using weather data to inform their buying and merchandising strategies and it’s about time they had access to simpler hedging solutions as well.

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