After the flood: finding ways to insure the uninsurable without breaking the bank

This post was contributed by Dr Diane Horn of Birkbeck’s Department of Geography, Environment and Development Studies. It originally appeared on The Conversation.

More wet and windy weather arrives week after week, with the inundated areas of the south and southwest of Britain still at the mercy of the elements. Even while politicians begin the blame game, we should look further ahead to when the floodwaters recede, the clean-up begins – and talk turns to who will pay.

In most countries, the government plays a role in covering flood losses. The UK is unusual because the government does not award compensation directly to individuals. Money is provided to local authorities through the Bellwin Scheme to reimburse the costs of emergency measures taken to safeguard life or property. But this is only intended to cover uninsurable risk.

Damage to private property is considered insurable and is not covered, which means compensation is drawn from the insurance industry, or charitable aid. The Prince’s Countryside Fund and the Duke of Westminster were among the first to make donations to help the flood victims, donating £50,000 each. As the floods continue, other businesses have pledged support. The government has also announced new measures, including a£5,000 grant to households and businesses to pay for repairs which improve a property’s ability to withstand future flooding. But most of those with property underwater will have to rely on insurance.

Unchartered waters

Big changes have swept through Britain’s flood insurance landscape. Until last July, flood insurance cover was available to households and small businesses as a standard feature of buildings and contents insurance under the Statement of Principles. Under this agreement, members of the Association of British Insurers (ABI) agreed to cover properties at risk of flooding in return for government commitment to manage flood risk.

Following extensive negotiations a new flood insurance scheme,Flood Re, was announced last June. This establishes a stand-alone, industry-run, not-for-profit insurance fund due to begin in 2015. Flood Re will provide cover for about 500,000 properties deemed at risk by the Environment Agency that might otherwise be uninsurable, or whose premiums are unaffordable. But the limitations of the Flood Re scheme need to be recognised.

While ABI members will continue to meet their commitments to existing customers, there’s no guarantee prices won’t rise between now and the implementation of Flood Re. In fact stories are already emerging about dramatic premium hikes, and the expectation is that these will rise further.

Policy recommendations

The government needs to take responsibility in the event of a catastrophic flood, but Flood Re’s liability will be capped at an expected limit of about £2.5 billion per year, equivalent to a 1:200 year flood loss scenario. As to who will bear the costs beyond this, the government has made no commitment. But this is a question that needs an answer. PricewaterhouseCoopers have estimated the insurance losses for December and January at £630 million, and while it’s too early to count the costs of the current floods, insurance industry forecasts suggest losses could reach £1 billion if the rains continue.

What is also needed from the government and insurers are incentives to reduce flood risk. Planning controls need to restrict development in flood risk areas, set higher standards for buildings on floodplains, and require that the best techniques to improve resilience against flooding are used when rebuilding and refitting after flood damage. As we argued in a paper published inNature Climate Change, using the flood insurance market to drive better adaptation to flood risk and the effects of climate change needs to be part of a wider strategy that includes land-use planning, building regulations and water management.

The Flood Re scheme needs to be clear whose insurance it will subsidise, and the effects on those not insured under the scheme. In fact many properties at risk will be excluded from the scheme. When Flood Re was first proposed, three categories of property owners were excluded from participation: small businesses, properties built after 1 January 2009, and properties in the highest council tax band.

It has since emerged that Flood Re will exclude many more properties than originally thought, with any policy classed as “non-domestic” unable to participate in the scheme, regardless of the risk. This will include housing association and council properties, many leasehold or private rented sector properties where homes are not insured individually, and properties which are both a residence and a business.

As it is, Flood Re does not reduce flood loss, but only spreads the risk, and therefore the costs, by protecting some policyholders at the expense of others. High-risk properties will be subsidised for decades by payments from low-risk households, with the financial risk still covered by the insurance industry, and government carrying no liability. Policyholders are unlikely to accept this situation without protest, and here the US experience may prove instructive.

Lessons from the US

In the US, flood coverage is excluded from property policies provided by private insurers, and is only available through theNational Flood Insurance Program (NFIP), with the federal government acting as insurer of last resort. Following massive payments for flood claims related to Hurricanes Katrina and Sandy, the NFIP is approximately US$26 billion in debt. This led to legislation to reform the program, phasing out subsidies over five years, and increasing the annual rate until premiums reflect the true risk.

But as rates rose and homeowners faced huge bills, sometimeshikes of 600-1000%, they pressured congress to delay these rate hikes. Republicans and Democrats found common cause for once, with the proposal sailing through the normally divided senate in a matter of weeks. Less than two years after the flood insurance reform legislation was passed, the senate voted to delay premium increases for up to four years while the Federal Emergency Management Agency drafts a plan to make flood insurance premiums more affordable and re-evaluates the accuracy of its Flood Insurance Rate Maps.

Flood insurance reform efforts in the US have shown the political implications of angry voters. With flooding in some parts of Britain about to enter a third month and costs spiralling, it is something the UK government is also learning the hard way, with Flood Re facing its first test before it even has come into operation.

The Conversation

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2 thoughts on “After the flood: finding ways to insure the uninsurable without breaking the bank

  1. I don’t believe insurance is the primary answer here, all that is needed is for the Environment Agency to do its job and dredge rivers on a regular basis.

    Also, some recent pronouncements categorically state that the recent flooding is nothing to do with climate change..

  2. I just read this blog, so my reply is 2 years late. But a reply is a reply 🙂 better late than never.

    Some people are attached to their location and heritage. Or sometimes their whole financial stability is wrapped up in one home/property. There are many reasons why people live in flood zones even after they find out it’s a great financial risk.

    We could learn from current peoples and ancestors who lived on or near water, learn from their mistakes, yet inject some new technology to be compatible with riverside/flood zone living.

    Houseboats, or new designs for homes on stilts that are many stories high, safe, beautiful and practical design for waste and water management. Sewage Hardware that does not completely rely on having solid ground for support. Mechanisms in place for ease of maintenance, which would not harm the environment.

    People will have to go eco-friendly and off-grid; or covert diverted water-flow power, to run electric (personal) local turbines.

    It make no sense rebuild the same sort of homes that can be ruined by floods. Make habitats water-tight but in such a way that lets water freely flow around diverting it gently without damage. Some homes may need to float.

    Places like Venice are sinking into the sea, and still the town is habitable.
    Holland solved some of their water flood issues, so it is possible to do the same for the UK.

    I am not suggesting floating shacks or shanty-towns (
    http://www.riverhomes.co.uk/pages/houseboats), but nice places to live.

    This may include some sort of a paired down small home living that works on water. (https://www.youtube.com/watch?v=wjqOkpNOQxM&ebc=ANyPxKrOlMVcWL_vFtRXoWtEI5agkeUcY0FQtvX6PwRmWoCUNLC4mAYo3iyaeByJzVwA1QH-skPy ).

    Work with the seasons and nature, housing as to adapt to environment because population is increasing not decreasing. And people who have land do not want to give it up.

    Similar to remote islands, food sources may have to be ferried in; canal boats may have to be re-purposed and built for commerce as well as homes. These will need affordable insurance cover, base on improved likely-hood of not having property damage.

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