Credit Suisse estimates UK flood insured loss at $2 billion, or higher

by Artemis on February 20, 2014

Insurance-linked securities (ILS) and reinsurance-linked investment manager Credit Suisse has issued an estimate for insured losses from the recent UK floods, saying that the insured loss from the UK flooding event could reach $2 billion or higher.

The estimate was published in an update on Credit Suisse’s CS Iris Low Volatility Plus ILS fund, which is the master fund for the London listed DCG Iris ILS fund. Credit Suisse said that the fund does hold some exposure to flooding in the UK, but at its current insurance industry loss estimate it does not expect any impact to the fund NAV.

Estimates of insured losses from the UK floods have been steadily rising as the flood catastrophe develops in the UK. With many areas still under water, groundwater levels at exceptional highs and more rain forecast, further flooding is likely and it could be weeks before the true extent of the losses can be fully understood.

Many estimates have suggested an insurance industry loss of £1 billion from the floods, which is around $1.7 billion, although some have suggested that the losses could approach levels seen in 2007 of £3 billion.

Credit Suisse said in its report today that while it believes that $1.7 billion is a reasonable estimate its analysis suggests that a higher insured loss, possibly reaching $2 billion or even higher given the extent and duration of the UK floods.

Credit Suisse is not the only one offering a higher estimate of the impact to the insurance industry from these floods. Analysts at Bank of America Merrill Lynch also believe that the final toll for insurers could be higher.

The Bank of America Merrill Lynch analysts said that industry losses for the insurance industry from the floods in the UK are likely to be lower than the 2007 loss, given that the percentage of rainfall considered to be above normal levels was significantly higher in 2007, while the geographic spread of the 2007 floods was also wider.

Despite that, Bank of America Merrill Lynch gives the highest loss estimate yet, saying they expect insurers will face a loss of £1.5 billion (around $2.6 billion). The analysts said that at this level the loss is expected to largely be retained within primary insurers, with the UK insurers Direct Line and RSA looking the most exposed, particularly if losses escalate.

Of course, with rain still falling across the UK and more forecast for the remainder of February the flood situation may not improve quickly which could lead to losses increasing.

It’s worth noting that Credit Suisse operates a range of ILS and reinsurance linked investment funds, with the CS Iris one of its lowest risk strategies. So while Credit Suisse said that this particular fund appears safe at current industry loss levels we cannot confirm that its higher risk strategies, such as the Iris Enhanced Fund, will escape exposure to the UK floods yet.

At the current industry loss estimate levels we would imagine that the Enhanced Fund would not see any impact to its NAV either, however we cannot confirm that and if industry losses from the UK floods do escalate any exposure to the floods in collateralized reinsurance vehicles will begin to look less secure.

Also read our recent article on the mounting losses from European windstorms and UK floods.

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