Insuring the future – Next steps for flood insurance in the UK and public-private partnership

By Sally Priest and Meghan Alexander, Flood Hazard Research Centre, Middlesex University

For flooded households, the experience of being flooded can trigger financial struggles, emotional stress and even health problems as people strive to return to normality. Adding to these burdens, there is a genuine concern amongst households about the impact of being flooded upon the affordability of future insurance. Even amongst those who are not directly flooded, simply being labelled as a property at risk of flooding can be enough to increase insurance premiums, potentially beyond what the household is able or willing to pay. In some cases, and typically amongst those renting, this can result in people opting not to purchase insurance for the contents of their property. In the UK this is particularly problematic as there is no central fund for compensating insurable risks and flood losses at the household scale.Sally_Priest

In an effort to ensure the availability of flood insurance, the Statement of Principles is a voluntary agreement forged between central Government and the Association of British Insurers (ABI). For those insurance providers signed-up to this agreement, the Statement of Principles commits them to cover households at risk of flooding. However, this is based on a number of conditions which serve to limit the exposure of the insurance industry. Whilst insurers are required to provide cover for household properties not at significant risk (i.e. 1 in 75 year annual probability), properties significantly exposed to flooding are covered on the condition that the Environment Agency intends to reduce flood risk (below the 1 in 75 year safety standard); either by strengthening existing defences or erecting new defences to protect vulnerable areas. Furthermore, newly built properties (post 2009) are excluded. Whilst this agreement specifies the availability of insurance, there is no provision for affordable insurance. Moreover, although the Statement of Principles adopts risk-reflective pricing, there is evidence to suggest that in reality there has been very little difference in pricing between those at high and low risk of flooding, resulting in affordability issues.

???????????????????????????????The Statement of Principles was only ever intended to be a temporary measure and, as we brace ourselves for the predicted increase in future flooding, it is recognised that a longer-term solution is needed. The Water Bill was introduced this year to the House of Commons on 27th June and is currently awaiting its second reading before reaching the committee stage (thereafter the Bill will need to progress through the House of Lords before it can gain Royal Assent). Within this Bill, the provision of household flood insurance addresses both the availability and affordability of insurance for high risk households. To meet this goal, a new system for insurance coverage is proposed in the form of Flood Re; a pool-backed system whereby the premiums of properties at high risk will be capped and subsidised by the pool. The Flood Re pool will essentially act as a reinsurance or claims pool from which insurers will be allowed to draw upon to settle claims. Premiums (and thereafter any subsequent claims) are subsidised by a levy payable by insurers, which will be passed on to every customer through a cross-subsidy for each policy with buildings and contents insurance. Whilst the Flood Re pool itself is to be owned and managed by the insurance industry as a not-for-profit entity, as the levy is payable on all insurance policies it is possible that some of the funding may be classified as a tax; therefore the status of the pool is still to be decided. If indeed there are some elements of tax, the pool may be need to be classified as part of the public, rather than private, sector; a decision which still needs to be resolved.

Whilst this new proposal may be regarded as a step in the right direction, from a negative perspective there appears to be no provision in the new system for directly encouraging the uptake of property mitigation, nor limiting access to the pool for those who suffer repeated claims. To this end, it seems that further consultation and consideration is needed into the role played by insurance in motivating adaptive human responses to flood risk.

Ultimately Flood Re is expected to roll-out in 2015, but in the meantime, a revised Statement of Principles has been agreed between the Government and ABI. This will be an interesting time for us in the UK as we monitor the progress of the Water Bill, the development of Flood Re and associated shift in the balance between public-private intervention. These developments hold significant implications for recovery against future flood events and will hopefully lessen one of the stresses that flooded households currently encounter.

Cockermouth flooding UK 2009

Cockermouth flooding in 2009 (© UK Environment Agency)