UK insurers ready to pull plug on flood cover

UK insurers ready to pull plug on flood cover

Government inaction over flood risk across the UK has prompted insurers to issue an ultimatum to ministers. Unless the Government agrees to work with insurers (through the offices of the Association of British Insurers) to produce a financial solution to sustaining universal flood insurance, hundreds of thousands of homeowners across the UK will find themselves off cover next year.

Here’s the background to the battle. The current Flood Insurance Statement of Principles agreement, whereby insurers agreed in 2000 to insure existing consumers in high-risk zones, expires in June 2013.

The ABI has warned in no uncertain terms that it will not renew the agreement because it “grossly distorts the market” by making householders in low risk areas subsidise those at higher risk.

Thus the Statement of Principles, signed back in 2000 as a short-term measure, has produced a stalemate, with policyholders playing pig in the middle.

Because high-flood-risk areas are red-lined, customers in high-risk areas are effectively tied to their existing insurer; at the same time, those insurers covered by it have ended up with a disproportionate number of high-flood-risk properties. 

Now the ABI says it has analysed the latest Environment Agency flood data against the 573 parliamentary constituencies in England and Wales and it can show that, despite Government pledges to tackle the rising flood threat, thousands of homes and businesses are still at significant flood risk, which is defined as a greater than a one in 75 chance of flood in any given year.

The analysis shows that there are as many as 200,000 high-risk households in the UK who will have difficulty renewing their insurance after June 2013.

Over 10 years ago, when the ABI signed its agreement with the Government there was a big emphasis on what could be done to improve flood defences, in other words to better manage the risk. And a lot of work was done.

The National Audit Office (NAO) reckons that the Government’s Environment Agency has brought 98% of defences classified as “high consequence” if they fail, up to target condition and is directing more of its funding towards these defences. In addition, the Agency has provided better flood protection for 182,000 households against a target of 145,000.

But it is not enough. The NAO said in October last year that because of climate change and ageing defences, an increase of £20m ($31m) is required on average each year between 2011 and 2035 to maintain the current level of flood protection.

The catch is that the Government has recently been busy devolving responsibilities to local authorities – most of which are now facing big austerity budget cuts. If councils were reluctant to get involved in shoring up their flood defences in 2008 (following the Pitt Review), they simply can’t afford it now.

So the ABI has all but given up now on the possibility of improved flood risk management helping to alleviate their situation.

Instead, UK insurers want the Government to enter into talks with them to discuss state involvement in an alternative method of risk transfer, preferably before they pull the plug.

No country in the world has an entirely free market providing universal affordable flood insurance, the ABI says, and now the time has come to examine the sort of subsidised coverage or pooling arrangements that are in place in other European countries.

The stakes are high. The NAO says that more than 5.2 million (one in six) properties in England are at risk of flooding from rivers, the sea, or surface water. The annual cost of flood damage in England is more than £1.1bn and is expected to rise, exacerbated by climate change.

And time is short. As Swiss Re says in its excellent round-up called “Floods – An Insurable Risk”, the variety of flood insurance solutions available in different countries around the world is quite astonishing: state and private insurers provide cover in a variety of casts, and the involvement of the reinsurance industry can be anything from “zero” to “substantial”. Insurance penetration levels lie between 0% and 100%, and the scope of cover – provided that insurance is available at all – ranges from “very restrictive” to “unrestricted”.

Tide is high, as the old song goes. It really is time for Government to stop holding on.

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