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Flood insurance: a new way forward

Anyone affected by the flooding in St Asaph, the Calder Valley and many other parts of the UK during 2012, the second wettest year on record, will know all too well the devastating impact it can have. The people of Cumbria will vividly remember the night of November 19th 2009, in which a record 314 mm of rain fell in 24 hours in Borrowdale, leading to flooding in Cockermouth and Keswick. We all remember the images of destruction as whole swathes of the UK spent June and July 2007 under water, resulting in £3 billion of claims. And the memorial services on the east coasts of Scotland and England in January of this year will have been a barely necessary reminder of the horror that flooding can cause for those who witnessed the 1953 North Sea storm surge.

We live on the edge of the Atlantic Ocean, with many of our most densely populated settlements on the banks of our rivers or on the coast. Adaptation to flooding is, and has been for many years, a fact of life for the UK. But as a country, we need to prepare for the risk to increase as a result of the changes already locked into our global climate. This means more flood defences built and maintained where they are needed most, robust controls about where we build our homes and offices, and flood insurance that is available at an affordable price.

No country in the world has cracked this crucial third part of managing flood risk without some degree of involvement from the state. In France, flood insurance is provided on a standard tariff and ultimately backed by an unlimited State guarantee. In Germany, an emergent flood insurance market battles a legacy of ad hoc Government disaster hand-outs. And the Netherlands does not have a flood insurance market at all, but one can understand why that may be. In the UK, the ABI and its members have developed a solution to this issue which has the potential to provide a truly sustainable way of ensuring those who most need flood cover can get it at a price they can afford.

Affordable flood cover

It is ground-breaking, but the concept is simple: it would allow those who are at highest risk to get access to affordable flood cover through a not-for-profit organisation we call Flood Re. This minority of households at highest risk are supported by a levy on the insurance industry, equivalent to the cross-subsidy that already exists in the UK market because of the current ‘Statement of Principles’. And should the sort of flooding we saw happen in 2007 happen in the first year or two before the fund has built up enough money, insurers would provide Flood Re with temporary funds to pay for claims. Flood Re would be designed to fully deal with at least 99.5% of years. Even in the worst half a per cent of years, Flood Re would cover losses up to those expected in a ‘1 in 200’ year – a year six times worse than 2007 – with Government taking primary responsibility – working with the industry and Flood Re – for distributing any available resources to Flood Re policyholders should claims exceed that level.

For around 98% of homes in the UK, nothing changes: the insurance industry would continue to offer cover as it does now. But for those 200,000 or so homes that, in a free market, would simply be unable to find affordable cover, Flood Re would provide the peace of mind that is so vital for the resilience of our homes, our communities, and our nation. For the insurance industry, a free market would probably be the better option financially, but we know we have a wider role in society than that. That is why we have spent two years and hundreds of thousands of pounds developing the solution, and will be investing millions of pounds getting Flood Re set up.

Working together

This is a novel approach – a world-first – and there are still some crucial issues to resolve about exactly how it will work. Flood Re’s successful implementation will depend on Government and the insurance industry working together in partnership to solve these issues – neither can do it alone. But, as Government has recognised, the outcome will be worth the effort: Flood Re as an industry-led and industry-run body is the best way to give those at risk of flooding the peace of mind they need. For Flood Re to be successful, it will need to prove to be a model example of how the Government and private sector can work together to solve some of society’s trickiest issues. I am hopeful that it will; hundreds of thousands of households across the UK depend on it.

Flooding can be catastrophic; it is the biggest natural hazard we face as a country. We can reduce the chance and the impact of it happening, but we cannot stop it from happening altogether. It is early days and the hard work is very much ahead of us, but today’s announcement is a crucial step towards providing peace of mind to the people of Cockermouth, Ceredigion, Comrie, Tewkesbury, the East Coast, and many other parts of the UK who know the horror of being flooded only too well.

Aidan Kerr is the ABI's Assistant Director, Head of Property & Health

Last updated 29/06/2016