UK storm & flood loss could near £2.5bn ($3.7bn), hours clause a factor

Insurance and reinsurance industry losses from UK winter storms and the resulting flooding that has been experienced in recent weeks could reach as much as £2.5 billion ($3.7bn), according to analysts at UBS, but the burden for the reinsurance market is uncertain with the hours clause a factor.

UBS noted in an analyst update on UK property insurers today that the top three insurers, RSA Insurance, Direct Line and Aviva could see net losses of £150m to £308m from storms Desmond, Eva and Frank. That would be equivalent to a 3%, 2% and 1% hit to the insurers market capitalisation, respectively.

UBS said that prolonged elevated water levels, due to the severe flooding caused by the torrential rainfall from the three storms, could add £1 billion to the highest insured loss estimate so far (£1.5 billion estimated by KPMG), although it noted there is considerable uncertainty on the final toll for the insurance industry to bear.

Some of that toll will be passed on to reinsurers and potentially to any ILS fund managers that participate in UK insurer reinsurance programs. However there is considerable uncertainty over how much of the loss will call on reinsurance for coverage.

With all three storms, Desmond, Eva and Frank, hitting the UK in December, the issue of the hours clause is raised. The hours clause can enable insurers to claims on their reinsurance for multiple events under a single retention and with the hours clause having expanded dramatically as a result of the softening of reinsurance it now presents more of a threat to reinsurers than before.

The average hours clause on reinsurance contracts was typically 168 hours (7 days), but the majority have now extended that to 504 hours (21 days). This tripling of the hours clause means that storms within 21 days of each other could be claimed for under a single reinsurance retention, perhaps passing on more of the losses to reinsurers and any exposed ILS players.

However, in the case of the three UK winter storms in December, the hours between the first and last storm is longer than the average limit.

UBS explained that Desmond started on 6th December, Eva on 25th December and Frank on the 30th December. That makes the gap between first and last 24 days.

Insurers RSA and Aviva both have the average 21 day hours clause in their reinsurance contracts, according to UBS, but Direct Line has a 30 day hours clause, which could allow that insurer to position all three events as one claim, and thus only have one retention at risk. RSA and Aviva would likely have to pay double retentions.

With fewer retentions more of the losses could be passed on to the reinsurance market, so the hit to any exposed ILS players would also be greater. However, even with a slightly greater hit to reinsurers, it is unlikely that any increase in property reinsurance prices in the UK will be seen, analysts believe.

So with the 24 days between the storms occurring outside the average hours clause, reinsurers are likely to see less of the loss passed on to them than would have been the case if all three had fallen 21 days or less apart.

Analysts at Morgan Stanley also noted however that RSA has a relatively low retention limit, of just £75m per event. That could result in more of RSA’s losses being passed on to its reinsurers.

On the hours clause, Morgan Stanley noted; “Despite the widening of the hours clause the primary insurers are likely to be hit by two catastrophe events. We believe that the storms are unlikely to affect pricing in the reinsurance property catastrophe space.”

The increasing insured loss estimate is no surprise. PwC has also increased its estimate of insured losses for the three storms, estimating a hit to the sector of £1 billion to £1.4 billion ($2.06 billion) yesterday, up from the £1.2 billion estimated last week.

Rating agency A.M. Best also noted the hours clause and that U.K. insurers have been able to take advantage of weak conditions in the global reinsurance market to achieve favourable pricing and contract terms in a report.

Catherine Thomas, senior director, analytics, at A.M. Best said; “For instance, hours clauses, which define the time period during which claims resulting from a given occurrence can be recovered as single aggregated loss, have been extended. As a consequence, insurers may be able to aggregate losses from two of the storms, so that excess of loss programmes are more likely to attach.”

Meanwhile, analysts at J.P Morgan Cazenove estimated that global reinsurance firm Munich Re could take up to €200 million of the losses from UK flooding, which is well below the reinsurers quarterly natural catastrophe budget of €340 million.

J.P. Morgan Cazenove also provides an estimate for the toll to insurance and reinsurance, saying it believes the losses could be up to €2.9 billion, £2.13 billion ($3.13bn), with primary insurers retaining approximately €900 million and reinsurers taking the remaining €2 billion.

A €2 billion loss for reinsurers would definitely imply some impact to ILS fund managers, some of whom will have participated in a number of the exposed primary insurers reinsurance programs on a collateralised basis.

At €2 billion (£1.47 billion or $2.16 billion) the loss to reinsurers is certainly at the high-end of estimates, we would say, and it won’t become clear how much of the loss falls to reinsurance capital until some time has passed as flooding continues and waters have yet to subside.

We’ll likely have to wait for reinsurer reporting later this quarter for some initial disclosures of loss estimates to come direct from companies. We may get some insight into any potential exposure for ILS funds via other sources and will update you.

It must be noted that at this stage there is considerable conjecture surrounding all of these loss estimates and they must be treated as very early still while flooding still continues to affect the UK, as until the events cease insurers will not know how best to claim on their reinsurance coverage.

Also read:

– UK storms Desmond & Eva loss estimate up to £1.2bn ($1.8bn): PwC.

– UK flood loss estimates rise to £1.5bn, Flood Re expansion called for.

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

– 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.