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March 19 (The following statement was released by the rating agency)
Uncertainty about UK government spending on flood defences means the Flood Re scheme to pool flood risk may face higher-than-expected claims in the future, Fitch Ratings says. In the long term this could push up buildings and contents insurance premiums for all UK households and in the short term could expose insurers to additional risk.
Under new funding arrangements, future central government capital expenditure on flood defences, which forms part of the joint understanding on which Flood Re is based, will remain below the 2010-2011 peak in real terms until at least 2020-2021. The level of funds provided through local investment, designed to offset some of the planned reduction, remains uncertain. Central government funds allocated for flood defence spending fell 6% in FY12-FY15 compared with the previous four years, representing a real-terms cut of around 20%.
A longer-term reduction in spending could increase the number of properties in England at significant risk of flooding. A study by the Committee on Climate Change estimated that spending would need to increase by around GBP20m a year on top of inflation through 2035 just to keep the number of significant-risk properties steady. This could mean that Flood Re's funds and reinsurance cover may prove inadequate to meet outgoings. In that situation, insurers would be required to make up the difference in the near term, but would then pass on the cost to households through an increase in the annual premiums.
The Association of British Insurers' latest claims estimate of GBP1.1bn from the 2013-2014 winter storms and floods is manageable for the sector, but would have been much higher if flooding had hit more highly populated areas.
The storms are likely to increase the sector's combined ratio by around 3.4 percentage points. The negative impact on insurers' earnings will therefore be limited and will probably be further reduced by future price increases. However, we expect earnings in the non-life sector in general to remain under pressure. The underwriting performance of personal motor business is likely to rely increasingly on prior-year reserve releases, while the contribution to earnings from investment income remains subdued.
Flood Re is a not-for-profit reinsurance scheme owned and managed by the UK insurance industry that will help to provide affordable flood insurance to households deemed to be at high flood risk. The scheme will be part-funded by a levy on all UK personal buildings and contents insurance policies, expected to be GBP10.50 per year. The scheme is expected to start operating in 2015 and last 20 to 25 years.