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Climate Change Adds UK Flood to Lloyd's Insurance Concerns

Lloyd's, the venerable British risk insurer, announced Monday that it has added a major flood in the United Kingdom to its set of Realistic Disaster Scenarios for 2009. Lloyd's uses RDS to stress test individual syndicates and the market as a whole to see how they stand up to exposures in very extreme cases; existing RDS events used in this way include earthquakes in California or Tokyo, windstorms hitting Florida or the Gulf of Mexico, and airlines colliding over large cities.

The request means Lloyd's insurers will try to estimate the insured losses associated with a major UK flood. "We identified several different factors that are converging to create one worrying dynamic," said Paul Nunn, head of Exposure Management at Lloyd's. "The most obvious development is climate change, and the scientific consensus that global warming will lead to more extreme rainfall events. And there is also uncertainty about how much longer UK insurers will continue to automatically include flood risk in their property policies. "Inclusive flood cover could well disappear within the next few years in the UK, and that could lead to a big change in the market and the insurers who write it," Nunn said in the release posted on Lloyd's Web site. "Lloyd's has a robust risk management strategy, and these different forces at work ring alarm bells with us," he added.

The Exposure Management team chose the Thames Valley for this new RDS because the threat is considered realistic there; it includes Oxford; Reading; the M4, M25, and M3 freeways; and Heathrow airport. The modeled event is an overall industry insured loss of £6.2 billion, of which £4.5 billion is residential and £1.6 billion is commercial property. "Flooding here will give rise to a much larger insurance loss event than anywhere else in the UK," Nunn said. "The disruption to Heathrow airport alone will result in material loss accumulations."

In the RDS, underwriters also will be expected to consider possible losses related to pollution, event cancellation, and business interruption. "Careful management of all kinds of catastrophe risk is a business imperative at Lloyd's," Nunn said. "And this latest RDS will draw the market's attention to a less well understood but serious exposure." Lloyd's, in conjunction with Infoterra, also has launched a new flood risk assessment service for its managing agents that gives them a better understanding of the flood risks their property portfolios face.

Lloyd's maintains a Risk blog at this site.

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