Insurers in hot water?
At the time of writing this article, many insurers are more concerned about keeping their financial heads above water than the propensity to flood of their insureds. Assuming the tide of insolvent banks has receded by the time you read this, insurers need to start looking ahead at the growing flood risk in the UK, and take some concrete action if they are to avoid picking up the bill for continued property development on floodplains. They have a chance to do so with the revision of the Association of British Insurers’ (ABI) Statement of Principles (SoP) on flood risk, taking effect from 1 January 2009.
More than one million people in the UK are at a ‘significant’ (greater than onein- 75 chance) risk of flooding and this number is likely to increase. A total of 10% of all properties in England are located on floodplains, and more than a million new homes are due to be built on floodplains by 2020 — including areas in Tewkesbury that were flooded in 2007.
The overwhelming consensus is that climate change and man-made developments (such as increasing urbanisation) are likely to increase the frequency, severity and cost of extreme weather events, such as the 2007 floods. A combination of higher sea levels and ‘tectonic shrinkage’ (which means that the south of the country is sinking and the north rising) means that coastal areas currently protected to a high level (typically against one-in-200-year floods) will only be protected to a one-in-five level by 2100.
Those of us living inland will be affected too: surface water (sometimes known as flash flooding) and groundwater flooding are set to increase too. Following the 2007 floods, the ABI revised its SoP on insuring properties in flood risk areas. They confirmed they would continue to insure existing properties protected to at least a one-in- 75 level of risk. However, the SoP does not apply to new properties built after 1 January 2009.
At the time of writing, the ABI has not yet issued any guidance on whether its members are willing to provide insurance for customers in new properties in high risk flood areas from 1 January and, if so, under what conditions. Although the SoP has been around for a while, no one has actually defined how the one-in-75 level is calculated. Some areas are at risk from several different types of flooding (coastal, river and flash flooding for example), so the combined level of risk from all types of flooding is far higher than the headline estimate from any one type of flooding. If the one-in-75 level is going to be a key criterion going forward, insurers need to agree how it is calculated and how often the level of risk gets revised.
Data on flood defences is difficult to acquire and, in places, of dubious quality. Both insurers and the public find it hard to get reliable information on flood risk. Many observers have little confidence in the Environment Agency’s assessment of flood risk. In their last three assessments, only 40% of UK properties stayed in the same risk category (low, moderate or significant) across each release; more than 10% of homes were in a different risk category in each release; more than one million homes had their risk category increased between one review and the next.
As well as the issue of how new properties will be dealt with and how the level of risk is assessed, the ABI faces the danger that the SoP is simply irrelevant. The GIRO Flood Risks working party performed a review of household premiums. This showed that it is still possible to get very competitive insurance quotes in almost all areas of ‘significant’ flood risk. If some insurers continue to charge far from realistic prices in high flood risk areas, whatever the ABI sets out in its SoP won’t make a blind bit of difference.
Julian Lowe is an independent consultant and contractor who was until recently the Aviva General Insurance Actuarial Director. He is a past chairman of the Profession’s GI Board and is a member of the Board for Actuarial Standards. The views in this article are his own and are not necessarily shared by The Actuary magazine or the rest of the working party.
Julian Lowe
