UK flood insurance industry losses could hit £1bn ($1.5bn): PwC

The United Kingdom continues to suffer from severe flooding, with the latest areas hit being Lancashire and Yorkshire, while impacts are still being felt in Cumbria. The insurance and reinsurance industry could end up paying for as much as £1 billion ($1.5 billion) of the costs, according to PwC.

PwC’s new insured loss estimate is very early (released on Sunday), as the flood event is ongoing in cities such as York and areas around Leeds, as well as a threat of further heavy rain and strong winds through the middle of this week.

At an insurance and reinsurance industry loss of around £1 billion there is a growing chance that reinsurance markets and potentially some insurance-linked securities (ILS) fund managers could be called on to assist insurers (or reinsurers) with their claims payments.

The flooding in Yorkshire and Lancashire, which has been at its worst over the last two days, is being discussed in terms of being unprecedented. The city of York remains under water, however levels are now thought to have peaked this morning.

The UK began to suffer with storm Desmond, which brought significant flooding to Cumbria and the north west UK. Cumbria was hit again in the most recent spell of flooding, caused by European windstorm Eva, but it is now the Yorkshire and Lancashire areas which have been hit hardest in the last two days.

The combined impact of storm Desmond and storm Eva is thought likely to cost up to £1.3 billion ($1.94 billion) in economic terms. PwC estimates that this could result in an insurance and reinsurance industry loss of as high as £1 billion ($1.5 billion).

Mohammad Khan, general insurance leader at PwC, commented; “After Saturday’s torrential rain, and with rare “danger to life” warnings issued, the economic damage to the UK could be significant. 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 £900m and £1.3bn, with the insurance industry bearing between £700m to £1bn of this. Unfortunately many areas that were affected during Storm Desmond have been flooded again.

“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 £1.5bn with an additional significant increase in insurer losses from our initial estimate.

“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. 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.”

Domenico Del Re, head of catastrophe management at PwC, added; “Recent additional flooding once again highlights a need to recognise that the introduction of Flood Re and the rebuilding of flood defences will not automatically solve the affordability of flood insurance, nor will it stop flooding when severe rain falls. Following the 2007 floods, a lot of work was undertaken on flood defences but clearly more can be done. Flood defences cannot stop everything, as they are based on historical information, but a lot more information exists today than there was even five years ago. Businesses (which are not covered by Flood Re) need to make use of all the flood data that is out there to make themselves more resilient when a flood occurs.”

The Association of British Insurers (ABI) said last week that it believed that storm Desmond and the UK floods up to December 21st could have cost insurance and reinsurance firms £520 million ($775m). That total has risen significantly with this latest spell of severe flooding and a £1 billion (or greater) insured loss now seems highly possible.

Also read:

– Storm Desmond & UK floods likely a £520m re/insurance loss: ABI.

– UK storm Desmond expected to cost insurers up to £325m: PwC.

– PERILS puts Cumbria, UK flooding under investigation.