OREANDA-NEWS. The UK's household insurance market will remain highly competitive despite the losses caused by Storm Desmond, Fitch Ratings says.

The storm damage was more localised than that arising from many previous UK weather events. Early loss estimates range from GBP150m to GBP350m, equivalent to between 3pp and 7pp of the sector's combined ratio for 2015, which we forecast to be 90%, excluding the impact of Desmond. We believe the loss will be manageable for insurers, although it diminishes the sector's ability to absorb further weather-related losses over the winter, should they occur.

Household premiums are at a five-year low due to a combination of below-average weather-related losses and intensifying competition. We expected the recent trend of slowing price declines would continue into the 2015-2016 winter even before Storm Desmond, as insurers become more cautious about a potential increase in weather-related losses. In addition, the costs resulting from the increase in the insurance premium tax and the introduction of Flood Re in April 2016 are likely to be passed on to customers in the form of price increases.

The negative impact on insurers' earnings from Desmond is likely to be limited because the storm's impact was relatively localised and outside more densely populated areas. But the scale of the insured losses will depend on how many businesses have been affected. If there has been significant business interruption, insured losses could rise above the current loss estimates. Losses from the storm even within the bounds of current estimates, coupled with further significant loss events over the winter season, could push the sector's personal property combined ratio above 100%. This will keep earnings under pressure, due to the significant competition in the market combined with subdued investment returns.

Desmond has also raised questions about the adequacy of flood defences, with some installed just a few years ago not proving fully effective against a storm of this intensity. Uncertainty about future government capital expenditure to reduce flood risk could expose insurers to additional losses in the short term. In the long term, it could push up buildings and contents insurance premiums for all UK households if the frequency of severe weather events increases.