As mainland Europe has been hit by the worst floods for decades and with the UK Government’s recent commitment to drastically improving domestic flood defences following our own crises, flooding has been making the headlines. Insurers have welcomed this commitment, as they too have been in the headlines over their home insurance policies in the wake of recent flooding in the UK.
Following press criticism of the insurance industry’s reaction to the rise in insurance claims in the wake of the recent spate of flooding in some areas of the UK last year, the industry announced a two-year agreement to continue buildings insurance policies for existing customers. This agreement includes all domestic and small business properties, except in exceptional circumstances. In practical terms this means homeowners will continue to have flood cover until January 2003. For many the continued provision of insurance will be of concern as the requirement of buildings insurance is a condition of a mortgage agreement.
However, media reports have once more alleged some areas of the country cannot get flood cover, which would have a negative effect on house prices.
It should be made clear insurers do not operate in this way. Their job is to assess the level of risk for individual customers, looking at their claims records and other relevant information ‘ including the state of flood defences. Premiums will reflect the risk. But where the evidence suggests flooding has become a virtual certainty, then insurance becomes almost impossible. Any homeowners with concerns about this should be encouraged to discuss their circumstances with their insurer as soon as possible.
Call for change
The debate over flood risk began in autumn 2000, when following a number of serious floods, deputy Prime Minister John Prescott described the situation as a ‘wake up call’ for the country.
Flooding that autumn damaged more than 10,000 properties, and the insurance industry dealt with more than 30,000 claims, paying out over £1bn. This spurred the Government to tackle the issue and it came up with three policy objectives. First, greater investment in flood defences and flood risk management; second, faster and more consistent decisions on flood management, requiring both organisational changes and rationalising of funding sources; finally radical curtailment of development in flood risk areas in order to prevent further exposure.
This marks a new step by a government, as investment in flood defences has tended to vary over time. However, because the greater part of funding is channelled through government departments to local authorities it is sometimes diverted into spending on other priorities. So while planned expenditure by the Department of Environment, Food and Rural Affairs (Defra) in 2003 will have risen 50% on 1997 levels, actual expenditure in 2000/01 fell 14% short of plans.
The Association of British Insurers (ABI) examined the investment requirements identified in Defra research and concluded that a minimum of £145m a year, additional expenditure is needed in order to build new ‘ and strengthen existing ‘ defences to the target standards Government has identified within reasonable timescales.
However, the Government’s Spending Review, announced in July 2002, included a commitment to increase spending on flood defences across the UK by £150m in 2005/06, and was welcomed by insurance companies and the ABI.
Over the past year the industry has worked hard to persuade Government that more needs to be done to improve Britain’s flood defences and this puts the Government’s target of £150m a year slightly above the minimum level recommended by the ABI. The trade body estimates for every £10m spent, a further 1,000 properties will be protected.
While extra money is important and urgently needed, improvements in flood management are not just about more money. It is also important the money is spent in the right way ‘ and in the right places. Insurers are understandably keen that future housing developments are planned in a way that doesn’t add to the problem. Looking at the whole picture, the industry recognises the movement made by the Government in these areas, as contrary to some reports, insurers want to continue to provide affordable cover to as many people as possible. Clearly, improvements in the system of flood defence management will make them better able to do this.
One of the key questions has been why this has only become an issue recently? Is it just because seasonal weather conditions been getting worse? While Defra research into the effect of climate change suggests winter rainfall could increase by between 15% and 30% over the next 50 to 80 years, it is not the only reason why flooding is becoming a concern homeowners.
Around 10% of homes in England and Wales are located in flood prone areas. But housing pressures in Southern and Eastern England in particular, could result in further significant development in the floodplain, given requirements to use brownfield land and not infringe on the green belt. Some 27% (by value) of planning applications received in 2000/01 were for sites located in floodplains. Recognising these pressures, the then Department of Transport, Local Government and the Regions (DTLR) issued revised planning guidance to local authorities regarding developments in floodplains last summer. This requires authorities to use a risk-based and sequential approach, using the safest sites first, and identifies flooding as a material planning consideration. However, it remains to be seen whether and to what extent planning authorities implement this guidance.
Assessing the risk
So what should borrowers do if they are considering moving to an area prone to flooding? One of the first things to do should be to contact insurance companies to obtain a quotation and guidance on the level of premium they can expect to pay. In many cases, it may be possible to contact the property’s current insurer to obtain a quote for insurance.
In addition, the Environment Agency’s website provides maps of the UK that detail floodplains across the UK. If there is any concern from insurers, people can also contact their local authority about the level of flood defences in the surrounding area and any planned construction of flood defences. If flood defences are being planned, prospective homeowners should alert insurers to this fact which may reduce the overall level of premium.
Something else to consider is flooding insurance. This is highly valued by domestic and commercial customers and has become an essential feature of household and property insurance over the last 40 years.
Originally introduced in response to significant flood events, flood cover has evolved in a highly competitive market to provide low-cost financial protection against events of low frequency.
However, weather patterns, land use, building technique and lifestyle changes have combined to both increase the frequency of flooding and the cost of damage arising from them.
Annual weather insurance claims totalling £1bn or more are not infrequent events. And at the moment, Government investment in flood risk management has not kept pace with the deterioration of existing assets, development or loss of storage capacity in flood prone areas and, even with the promise of an increase in spending on flood defences, makes no provision for the effects of climate change.
Since the overwhelming majority of flood claims arise from river flooding, discussions over the last few years have rightly focused on improving planning processes to avoid further exposure to flooding, modernising and streamlining flood risk management and funding, and bringing investment in defences back up to sustainable levels. The jury is still out on whether Government has achieved the first of these and commitments have not yet been given, nor action taken, on management and funding issues.
Conventional flood cover can only be maintained where risk is effectively managed. So 2003 is a key year, and both the Government and the Environment Agency must demonstrate the new commitment to increased expenditure will be translated effectively into real defences that provide real protection for homeowners. Likewise, the insurance industry, whose agreement lapses on 31 December 2002, must continue to show a realistic understanding of the views of its customers.
Jane Milne is manager property and household insurance for the ABI
l For more information on flooding, visit www.environment-agency.gov.uk
The insurance industry’s two-year agreement to continue buildings insurance for existing customers in flood-risk areas runs out at the end of the year.
10% of homes are located in flood-risk areas, and nearly 30% of planning applications are on floodplains.
Insurers may be more amenable to offering cover if flood defences are being planned in the area.