OREANDA-NEWS. The recent series of storms and floods in the UK will significantly weaken 2015 earnings from household insurance for some firms, but are unlikely to affect insurers' capital levels or ratings, Fitch Ratings says. The widespread nature of the flooding is also likely to result in an increase in spending on flood defences and a reassessment of where money is spent.

Total insured loss estimates for storms Desmond and Eva range as high as GBP1.5bn. This figure will rise further when the cost of the final storm of the year, Frank, is added. The scale of insured losses will also depend on how many businesses have been affected. If there has been significant business interruption, insured losses could rise above the current estimates.

We believe the flooding could increase the industry's personal property accident year combined ratio above 100%, indicating an underwriting loss. But insurers are likely to use reserve releases to bolster their 2015 results and may therefore still report a profit for the year in this sector.

We believe premiums are starting to bottom out after a longer period of declines that has pushed them to a five-year low. We have previously said that a major claims event could be a catalyst for a rebound in premiums, but it is not yet clear whether the flooding claims will be big enough to spark this reversal. There is a lot of capital flowing into the household segment as companies seek to diversify away from the highly competitive motor insurance sector, and this could be sufficient to keep pressure on premiums.

The storms also raised questions about the adequacy of flood defences, with even some recently installed defences proving inadequate. In response the UK government has already pledged GBP40m to fix and bolster flood defences in Yorkshire and GBP50m to aid the local authorities' response to the floods.

The government had previously announced GBP2.3bn of investment in flood defences over the next six years. A reassessment of defence plans in many areas and an increase in overall spending is likely, but we do not expect the government's contribution to return to its 2010-2011 peak. Central government funds allocated to flood defence spending in FY12-FY15 fell by around 20% in real terms compared to the previous four years.

Failure to keep up flood defence spending could lead to higher-than-expected claims for the UK's Flood Re scheme, which is intended to provide affordable insurance to households deemed to be at high risk of flooding. A long-term increase in the number of properties at significant risk of flooding could result in Flood Re's funds and reinsurance cover being inadequate to meet outgoings. In that event, insurers would be required to make up the difference in the near term, but would then pass on the cost to all households through an increase in annual premiums.