Double Exposure?

UK government coy on new approach to flood risk insurance - industry body says 200,000 homes may become uninsurable

Does UK belong in European adaptation mainstream?

Imagine you are crossing the road. You look up as you hear the rumble of a heavy engine, and you see a lorry headed slowly towards you. The driver is hanging from his window, frantically shouting that his brakes have failed and that you should get out of the way. You try to move – to get to the safety of the pavement – but you can’t. It is a curious kind of terror – the truck is moving so slowly that it will take a while for the disaster to occur, although occur it must. You are left to contemplate your end at leisure, and in grim detail, while others look on. Welcome to the world of the British coastal climate ‘loser’ – if not yet a certainty, then a deeply worrying prospect.

Existing agreement will not be renewed

As things stand, homeowners who live in areas likely to be lost to the sea can already expect to lose everything without compensation. Now we are faced with the prospect that, in the mean time, those at the highest risk of flooding will either not be able to obtain or not be able to afford insurance for our homes. Last week UK newspaper The Guardian reported on remarks made by Parliamentary Under-Secretary for Natural Environment and Fisheries Richard Benyon to the effect that an agreement with the insurance industry – due to expire in summer 2013 – will not be renewed.[1]

The current understanding commits insurers to make insurance available to householders and small businesses as a feature of standard policies “if the flood risk is not significant” or, where there is significant flood risk, providing the Environment Agency is committed to reduce that risk below the ‘significant level’.  Whilst a new shared understanding between government and the industry is expected shortly, it is by no means clear what this will mean, and the messages from various communications are mixed. A Written Ministerial Statement in December 2011 expressed a commitment on the part of both government and the insurance industry to “making sure flood insurance remains widely available”, whilst hinting at the emergence of risk-based pricing – in other words, that those in properties most at risk can expect to pay more.[2] This represents a shift of gear from the recent orthodoxy of “a cross-subsidy…between those at low and high risk of flooding” as expressed in the final report of government working groups on this subject[3] (p.4).

Government asserts that “the primary problem in the future will be the affordability, rather than the availability’ of flood insurance premiums for households and small businesses” (p.4) – a state of affairs that it is seemingly content with, given the statement that “…premiums and excesses should reflect the risk of flood damages to the property insured”. (p.5) However, a new report from the Joseph Rowntree Foundation[4] suggests that the Association of British Insurers sees things rather differently, estimating that “some 200,000 households may become uninsurable when the current agreement ends in June 2013” with the prospect of neighbourhoods in which house are unsaleable and uninhabitable – to say nothing of the catastrophic personal effects this state of affairs might bring (p.3).

This all depends, of course, on which way the Government elects to jump when deciding upon which option it will go with when the current agreement expires. According to the report these range from doing nothing and allowing the market to adjust; ‘Facilitation’ involving support of the market through, for example, improving education and signposting to help ensure take up; and the creation of a ‘risk pool’ to which would see the combination of a free market with subsidisation of high risk property to ensure that affordable cover remains available. Besides a recommendation that ‘Facilitation’ options are taken up regardless, the report is coy as to preferences.

European comparisons

A recent analysis of national climate change adaptation strategies in Europe by the Partnership for European Environmental research (PEER) [5] stresses that such strategies will always involve a mixture of approaches” which it classifies broadly as:

• Living with risks/bearing losses - an approach that accepts that certain systems, behaviours and activities can no longer be sustained (the abandonment of some areas of coast, for example)

• Preventing effects/reducing exposures - illustrated by the practice of implementing technical solutions such as sea defences, and

• Sharing responsibility – an approach which implies sharing the responsibility for financial and social losses or exposure to risk. (p.58-59)

 Insurance falls under the third of these approaches, although the Rowntree report reinforces the point that “The UK is peculiar in having a purely market-based approach to insurance in which risk is reflected in the premiums paid and borne by individual households” (p.2) and that “…in many EU countries, as well as in the USA, the provision of insurance or relief against flood damage is provided by or is guaranteed by the government.” (p.3) Thus, UK’s idea of ‘sharing responsibility’ might already be considered the ‘lite’ version. 

Despite the broad international adherence to the mixed model approach to adaptation, the PEER report asserted that “different emphases can be noted between countries in relation to how they deal with risk and make decisions about different adaptation options.” (p.61) Through policies of allowing areas of coast to be lost to the sea (and for homeowners to bear the costs) at the time the PEER study was undertaken, the UK had already planted one foot firmly in the ‘living with risks/bearing losses’ category. Subsequent announcements of reduced investment in sea defences and an increased requirement for local contribution in such infrastructure in the future suggests a corresponding withdrawal from the ‘Preventing effects/reducing exposures’ category. To now leave flood insurance cover to the vagaries of the market would surely see the UK risk an exit the identified mainstream ‘mixed-model’ approach, and leave coastal losers looking into eyes of the driver of the climate change truck. We’re all in it together, anybody?

Best wishes

Chris

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[1] http://www.guardian.co.uk/money/2012/mar/07/flood-hit-homeowners-invest-defence

[2] http://www.parliament.uk/documents/commons-vote-office/DEFRA-5-Flood-Risk-Management-Arrangements.pdf

[3] Defra. 2011. Flooding and insurance: a roadmap to 2013 and beyond Final Report of the Flood Insurance Working Groups. London: Defra.

[4] O’Neill, J. & O’Neill’ M. 2012. Social justice and the future of flood insurance. York: Joseph Rowntree Foundation

[5] Swart, R., Biesbroek, R., Binnerup, S., Carter, T.R.,2009., Cowan, C., Henrichs, T., Loquen, S., Mela, H., Morecfort, M., Reese, M. and Rey, D. Europe Adapts to Climate Change: Comparing National Adaptation Strategies PEER Report No. 1. Helsinki: Partnership for European Environmental Research.