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What a wetter Britain will mean for insurers

At a glance

  • Six million properties in the UK are at risk of some level of flooding
  • In August, the ABI and UK government tentatively agreed terms of Flood Re to ensure continued insurance coverage for 500,000 homes in high-risk areas. Critics say the fund does not take into account global warming
  • Zurich’s report ‘European floods: using lessons learned to reduce risk’ urges multi-agency alliances between insurers, governments and communities to reduce flood risks

This article counts towards accumulating your annual CII CPD structured learning hours for Weather.

By reading this article, and correctly answering the three questions underneath, you will have achieved the following learning outcome: Recognise the different categories of flood risk and identify how each category could affect customers differently.

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We are blessed with short memories. For many of us this year’s long, hot summer has more than made up for the fact that, according to Met Office figures, 2012 was the second wettest year since UK national records began in 1910.

And it’s not just a British phenomenon. In June 2013, Germany, Austria, the Czech Republic, Slovakia and Switzerland were devastated by superfloods which saw thousands of people forced to seek temporary shelter as the Danube, Inn and other rivers burst their banks.

In 2002, similar flooding displaced many of the same residents. And yet, a Zurich report found that some “had already forgotten about the damage that occurred in the 2002 floods, and faced with renewed flooding in 2013, believed they had exposure to only infrequent flood losses”.

However, the cost of making right the damage is not something that European governments, communities and insurers are likely to forget. Total damage to property caused by the European floods of 2013 currently stands at £14.3 billion, and only £3.4bn is estimated to be insured.

The rain falls mainly on the floodplains

According to the Royal Institute of British Architects (RIBA), there are two primary causes of flooding. The first is climate change, which is creating extreme weather including severe rainfall. The second is building new housing on known floodplains.

In the UK, it is estimated that six million residential and non-residential properties are at risk of some level of coastal, river and surface flooding – that is one in every six households. What’s more, 500,000 properties are located in high-risk areas where there is a 1-in-75 chance of being flooded each year.

These are remarkable numbers, but they’re likely to get higher. Nowhere in Britain is more than 74 miles from the sea, and if the recent assessment from the Intergovernmental Panel on Climate Change is to be believed then sea levels are set to rise three feet by 2100. And it’s not just coastal areas that are likely to be affected. Britain’s penchant for situating at least 10% of new homes on floodplains such as the Thames Gateway is also adding to the households at risk.

The Association of British Insurers (ABI) noted concerns that the existing Statement of Principles agreement was no longer functioning as originally intended and another solution was urgently needed.

In August, after a period of lobbying, the UK government agreed to a £10.50 levy on each household premium from 2015 to fund Flood Re, a scheme that will provide £180m each year to subsidise the insurance to high-risk households. The government has also agreed to invest an additional £370 million in flood defences in 2015/16 and to increase this sum in line with inflation over the following five years.

Flooding graphic

No cover for the high-risk?

It’s a good starting point, but it already has its critics. Flood Re is unlikely to cover housing built after 2009 or high-risk homes in the highest council tax band. Nor will it include the UK’s 14 million small businesses.

Another equally pressing issue that the ABI and others have is that the existing “>Statement of Principles agreement with the UK government was no longer working and something else, at least in the short to medium term, was needed if stakeholders felt that a free market would not operate satisfactorily.

“The industry is working hard to ensure long term availability of flood cover and that specialist brokers can usually arrange cover even for the very high risk properties,” said Steve Foulsham, Head of Technical Services at the British Insurance Brokers’ Association (BIBA).

“But there is no guarantee that Flood Re will be adopted at this time; not least that it requires European Commission approval.

“The Statement of Principles continues, meanwhile, so whilst the government and insurance industry are looking to develop a solution, at the present time individual risks are being handled by insurers in accordance with the Statement of Principles.”

BIBA also points out there is also a £100m funding gap where Flood Re finishes and reinsurance begins. With a £2.5bn limit on re-insurance, it’s also not clear who would pick up the bill should there be a superflood affecting somewhere as densely populated as the east coast of the British Isles.


Ray of sunlight?

Some also see a moral hazard with insuring properties in flood plains. If individuals are protected from the full cost of insuring a flood prone property, then there’s little incentive to make improvements rather than carry out like-for-like repairs.

At present, the insurance industry does not require resilience measures to be taken to make good on a claim. “Our solutions to continue cover may include confirmation that a customer has signed up for Environmental Agency flood warnings,” said Steve Gilbert, Personal Lines Technical Underwriting Manager for Zurich, but he acknowledges that, “some customers can be reluctant to engage when they have just been flooded, or when they can secure cover elsewhere without having to improve measures at their property”.

Graeme Trudgill, Executive Director at BIBA, added: “Flood Re is a transitional comfort blanket for property owners before returning to an open market. The reinsurance arrangement will have a 25 year life span to enable flood defence measures to gain more prominence before this happens.”

The term ‘uninsurable’ has been conflated recently with the principle of ‘affordable insurance’. Consumers need to be aware that risk-reflective pricing means that some of their important life decisions, in terms of allocating disposable income, have to be influenced by the risk they bring to insurers

Steve Gilbert, Personal Lines Technical Underwriting Manager for Zurich

In Flood Re’s quest to ensure only a minimum number of properties are designated as ‘uninsurable’ it could fail to sufficiently encourage measures that will reduce future risks.

“The term ‘uninsurable’ has been conflated recently with the principle of ‘affordable insurance’, and for me the two are different,” said Steve at Zurich. “Flood Re will need to be clear on how and when it distinguishes between them. In addition, what ‘affordable’ means in practice has to be made clear. If a property is going to flood every 10 years and cost £30,000 each time to repair, insurers are likely to want annual premiums for flood alone of £3,000, so for Flood Re to become unnecessary in 25 years’ time customers must have come to expect to pay that type of figure. So, longer term, consumers have to be more aware that important life decisions in terms of allocating disposable income will be influenced by the risk they bring to insurers.”

While Environmental Agency advice is available to planners and policy makers, new builds on floodplains continue. “More can be done to make Environmental Agency advice binding on development applications,” added Steve at Zurich. “And the ABI, Zurich and other insurers continue to make similar representations to government departments.”

In the short term, perhaps, the European Union flood directive that requires all member states to establish flood risk management plans by 2015 will help shore Flood Re’s defences. Only time and experience will tell. Until then, let’s hope the sun continues to shine.

Image © Getty

For more information, get in touch

Steve Gilbert | Personal Lines Technical Underwriting Manager for Zurich | 01489 864902

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