These storm losses, which are likely to be earnings events rather than capital events for most UK P&C insurers, are credit negative for UK P&C insurers. We expect them to suppress 2013 profitability, particularly against the backdrop of declining premium rates in property insurance in recent quarters. Given the size of the expected losses, Moody's expects the burden to fall primarily on direct insurers, with reinsurers ultimately only bearing a small amount of losses.
Although it is too early to quantify the total insured losses across affected countries, Willis Re, according to the Financial Times, estimates that UK insured losses alone could reach £300-£500 million. At the upper end of this range, the industry-wide losses would increase the 2013 UK insurance combined ratio (the ratio of insurance claims and expenses to insurance premiums) by approximately 1.5 percentage points. Moody's considers that the UK insurers most likely to be affected to be UK Insurance Limited (financial strength A2 stable), Lloyds Banking Group plc (insurance subsidiaries’ financial strength A2 stable), Aviva Plc (insurance subsidiaries’ financial strength A1 stable) and RSA Insurance Group Plc (insurance subsidiaries’ financial strength A2 stable), all of which have significant personal and/or commercial property portfolios, classes that are most likely to experience storm-related losses.
Property insurance premiums equalled 26% of UK P&C insurance premiums in 2012, according to the Association of British Insurers. We therefore expect 2013 combined ratios in UK property portfolios to deteriorate by as much as five percentage points as a result of the St. Jude’s Day storm. These losses, combined with recent rate pressures in UK personal property* will lead to lower 2013 profitability in property, which includes personal property, a class of business that has typically been profitable for UK insurers in recent years and that has effectively subsidised insurers’ loss-making motor portfolios.
However, although these losses may help arrest the trend of declining premium rates for UK property risks over the next 12 months, Moody's expects these losses’ wider pricing implications for UK insurers to be modest, with the losses significantly smaller than the approximately £2 billion of inflation-adjusted losses arising from the UK’s 1987 storm, where wind speeds peaked at 115 mph.
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