Why was the recent statement on flood cover from the Association of British Insurers (ABI) so important?
Unlike the rest of Europe, in Britain, flood protection is currently built into all household insurance policies. However, the agreement to provide this cover by the ABI’s 440 members ‘ the UK’s major insurers ‘ was expected to end in December 2002. This would have spelled bad news for the 1.3 million homeowners in England and Wales who live in high flood risk areas because if they were unable to insure their properties, the value of their homes would have fallen dramatically and in many cases probably would have become extremely difficult to sell.
In recent years, damage caused by flooding both to houses and their contents has unfortunately become a widespread annual event. While our climate appears to have become wetter, one of the main causes for the rise in the number of properties being flooded must be that during the 1980s and 1990s large numbers of new homes were built on flood plains. The flood defences in many of these areas were, and continue to be, extremely poor. The Government has subsequently issued additional planning guidance preventing homes being built on flood plains, but for many homeowners this decision came too late.
What did the ABI’s new Statement of Principles say?
The statement issued on 26 September 2002, which will come into effect from 1 January 2003, replaced a temporary agreement put in place by the industry following the floods in autumn 2000 which cost insurers over £1bn in damage repair.
The statement confirmed the ABI’s members will provide flood insurance for as many homes and small businesses as possible. These will be properties protected against the risk of flooding at or above the Government’s minimum standard ‘ this standard assumes it is likely a property could be flooded once every 75 years. Obviously, the risk associated with each property will vary and affect the premium charged by insurers and the excess policyholders will have to pay in the event that they make a claim.
In areas where the risk of flooding is unacceptably high but where adequate flood defences will be put in place by 2007, insurers will continue to provide cover for properties they already insure, both to existing and future owners. Again, the cost of cover will vary depending on the perceived risk of flooding and there is no onus on insurers to provide cover for properties insured by other companies.
Where improvements in flood defences are not planned, insurers are not required to guarantee to maintain cover and will examine the risk of flooding on a case by case basis. The reality is, however, that if insurers are prepared to provide cover it is likely to be expensive and excesses may be as high as £8,500.
Do homeowners have anything to worry about?
While on paper this is excellent news for homeowners, a lot relies upon the Government delivering its side of the agreement and putting in place the promised new flood defences. The insurance industry should be applauded for meeting the Government half way, because if it had not, the housing market in certain areas would have been thrown into turmoil.
Insurers will be watching the Government closely and if the £150m investment in flood defences is not forthcoming, there is nothing to stop them withdrawing their commitment.
Does the Government still intend to impose a flood tax?
The Government had proposed introducing a special ‘flood’ tax of £60 a year which would be levied on vulnerable properties to help pay for the flood defence improvements.
While the tax itself would not be onerous, the knock-on effect could be. It may not tell insurers anything they do not know already, but it would certainly flag up potential serious problems associated with these particular properties to private buyers.
How do insurers decide which houses are most at risk?
For some time the major insurers have been using sophisticated software to identify areas by postcode which are most vulnerable to flooding. This approach allows insurers to assess the risk and set the premium for each individual property.
Norwich Union recently announced it had taken its risk assessment a stage further by creating digital photographs of areas, which will measure the height of ground levels far more accurately than the maps currently used to chart flood risk. The maps will be used in conjunction with computer models, which will be able to simulate the risk of flooding given a range of weather conditions.
As a mortgage broker, why should I be interested in household insurance?
It is a condition of most mortgages that the borrower must put adequate buildings insurance in place. When arranging a mortgage for a client it makes sense to offer to quote for this and other mortgage-related insurance products such as contents cover, income protection and life policies which they may have to have, or be interested in purchasing.
Building up an expertise in this area will provide an excellent opportunity to build a valuable income stream ‘ through earning commission on the products sold ‘ which can be added to the procuration fees paid by lenders.
David Quick is managing director of CETA