Storms Ciara and Dennis to weigh on UK insurers' profitability, warns Fitch

The losses from storms Ciara and Dennis, which brought strong winds, torrential rain and widespread flooding to the UK over the past week, will increase pressure on UK household insurers' profitability in 2020, warns a new report by Fitch Ratings.

"The losses, although unlikely in our view to exceed £500 million, could offset insurers' otherwise quiet start to 2020 and contribute to a combined ratio above 100% for 2020, indicating an overall underwriting loss," the agency said.

Fitch views the outlook of UK's non-life company market as already week, and after the occurrence of two windstorms in the same week in February it expects substantial pressure on the profitability driven by increased claims inflation and weak pricing for both household and motor insurance.

"Profitability is already weak, the result of suppressed pricing and increased claims inflation. This makes the sector more vulnerable to the impact of large weather losses."

"UK household insurers have been suffering from a weak pricing environment for several years due to a highly competitive market, with price rises substantially below claims inflation, which was in high single digits in 2019. The average premium for a combined household policy increased only 2% yoy in 4Q19, while that for buildings insurance fell by 1%, according to the Association of British Insurers," Fitch noted.

Fitch said that these events also highlight the importance for insurers to address the impact of climate change on their pricing models, and assess whether their reinsurance programmes are still adequate. Extreme weather events like floods are likely to become more frequent and costly as a result of climate change, and many properties are likely to become more at risk of flooding and more costly to insure.

"We believe that flooding will become an increasingly important consideration for the UK insurance sector in the coming years," the agency said, stressing that a "long-term solution is required" to ensure that all households are able to obtain affordable flood cover.