The series of wind and rain storms that have hit the UK since the beginning of the year has begun to aggregate into a sizeable loss for insurers of UK homeowners and commercial business. Auditors PricewaterhouseCoopers together with actuaries Deloitte made an estimate of insured loss of around $500m earlier this week. Since then, it has continued to rain and floods have been reported in even more areas.

At present, the number of homes flooded is relatively small, with the Environment Agency stating on 14 February that fewer than 6,000 homes have been flooded since the beginning of December. This compares favourably with the last major incidence of flood in the UK, when almost 50,000 homes and nearly 7,000 businesses were flooded in two periods of sustained rainfall in June and July 2007.

Amongst areas suffering large losses in 2007 were Tewkesbury, Cheltenham and Gloucester and parts of North Lincolnshire and East Yorkshire. The flooding in 2007 caused approximately £3 billion of insured loss, with the largest single event, storms in July, costing insurers around £1.2 billion.

Our records show that these events added an average of around 1.5% to the gross loss ratios of the syndicates supported by Argenta clients.

The largest loss suffered by a single syndicate was Syndicate 218, which suffered gross losses of around £35m, and net loss of £6m, spread across the 2005, 2006 and 2007 underwriting years. This syndicate has since withdrawn from the UK homeowners market, and Equity has confirmed that losses to the syndicate arising out of this series of events is likely to be far smaller. 

To date, and without wishing to belittle the misery and suffering of those who have seen their homes inundated, it seems that most of the losses have been sustained in rural communities with limited loss to major conurbations. This may change, especially as much ground is now so saturated that no further rain can be soaked up. This morning there were 16 severe flood alerts in place, and a further 127 locations with a flood warning. 

Reinsurance programmes for writers of direct UK business attach at around a market loss of £1billion. Some companies do buy cover below this level, but our understanding is that this is the exception rather than the rule.  These sub-layers are often only partially placed and they are rarely written in the Lloyd’s markets It now appears likely that losses will aggregate together such that some of the lower reinsurance layers will be hit by losses.  

One factor that will influence the degree to which losses are passed to the reinsurance market will be the “hours clause”. This restricts cover under a reinsurance policy to losses that occur within a specified period of time.  At the January renewals, many insurers sought to increase the hours clauses from the standard 72 or 120 hours, with, we understand, some reinsurers acceding to requests for an hours clause equivalent to one month.

Flood insurance has been a topic of debate between the government and the insurance industry, with insurers currently implementing a gentlemen’s agreement to continue to offer insurance to existing policyholders in flood exposed locations. There is a memorandum of understanding between the industry and the government to develop Flood Re, a not for profit fund covering the cost of flood to high risk homes. The fund will be capitalised to deal with one in 200 year flood events, with the government standing behind the fund should losses exceed its capacity to pay. It is hoped that Flood Re will be in place by the summer of 2015.