OREANDA-NEWS. The extra funding for UK flood defences announced by Chancellor George Osborne on Wednesday is positive for the insurance sector as it reduces the risk of a shortfall in the country's flood reinsurance scheme, Fitch Ratings says. If the scheme's funds and reinsurance cover were inadequate to meet outgoings then insurers would have to make up the difference in the near term.

The extra spending announced in the UK budget - GBP700m over the next five years - will be funded by a 0.5 percentage point increase in the insurance premium tax (IPT). This represents a roughly 30% increase to the current GBP2.3bn capital programme over the same period.

A series of storms over the winter raised questions about the adequacy of flood defences. Even some recently installed defences proved inadequate, highlighting the risk of a long-term increase in the number of properties at significant risk of flooding. The flood reinsurance scheme, known as Flood Re, is designed to provide cover for these properties and is funded by a levy on insurance policies. A failure to keep up flood defence spending would therefore increase the number of properties the scheme would have to cover, increasing the risk that it would not be able to meet future claims.

The latest estimate of insured losses from the winter storms put the cost at around GBP1.3bn. We do not believe this will be enough to significantly increase household insurance premiums, but it may slow the recent fall or create a modest temporary rise.

The increase in IPT to fund the flood defence spending should not have a significant impact on insurers as we expect they will pass it on to customers. However, firms could benefit marginally if they increase premiums by more than the increase in the tax rate. This happened the last time the IPT was increased in November, when even after stripping out the IPT element, motor premiums in the quarter rose the most since 2010.