Introduction
Good afternoon. Thank you for that introduction and thank you for the opportunity to be with you today to give an insurance perspective on some of the issues on your programme over the next two days.
Flood risk
Putting it bluntly, the UK is not a country renowned for the brilliance of our weather. It rains here – a lot – as we have seen in the past few weeks. Which means that as a country we are unfortunately very familiar with the devastation that flooding events can bring to towns, cities and communities across England, Scotland, Wales and Northern Ireland. Whilst other countries face the challenges of hurricanes, wildfires or earthquakes, the biggest natural catastrophe risk that the UK faces comes from flooding. In fact, one in every six properties in England alone is at some form of flooding risk whether that comes from the sea, rivers or surface water flooding.
Summer 2007 was the wettest on record, with more rainfall from May to July than any period since records began in 1766. The result was a total cost of £3 billion to insurers. There were 130,000 homes insurance claims, 35,000 claims from businesses and a further 20,000 vehicles damaged. 17,000 customers needed alternative accommodation.
Three storms over the winter of 2015/16 lead to the most significant flooding the UK has seen in recent years. 20,000 flood claims were made at a total cost of £1.3billion – the average cost of a claim for a domestic property was £50,000.
And in November last year, Yorkshire and the Midlands were struck by serious river and surface water flooding. Our latest estimate is that insurance claims are expected to reach almost £150 million. It’s too early to say how much the most recent Storms Ciara and Dennis will cost, but we are currently asking our members that very question.
The UK is, of course, not unique in dealing with the risks associated with flooding. Like all the countries represented here today, we are grappling with the challenges associated with climate change, not least as the hosts of the COP26 conference in November. In the UK, a warmer climate is likely to lead to sea levels rising, increasing the risk of coastal flooding; and more frequent and severe rainstorms, increasing the risk of inland flooding, especially surface water flooding. Current estimates suggest that even if the Government invests in flood defences and there was no further inappropriate building in flood risk areas, there would be over 250,000 properties that remain at high flood risk by 2060.[1]
The numbers are stark. And it is important to remember that insurance is a way of managing the risk of flooding, but the problem is the risk itself.
Policy issues arising in flood insurance
In the UK, insurance against the impact of flooding has been a standard feature of household insurance since the 1960s. This has led to the insurance industry playing a leading role in the public policy discourse on flooding over many years.
At its most fundamental, insurance is about pricing risk. Younger drivers crash more often than older drivers and so their insurance is more expensive. Commercial buildings with sprinklers fitted to reduce the spread of fire, can often benefit from significant reductions in their premiums. And, absent any other interventions in the market, properties at significant risk of being flooded face higher insurance premiums.
It is this dynamic that led to many properties across the UK facing flood exclusions from their insurance, very high excesses and costly premiums. With hundreds of thousands of properties at flood risk, the insurance industry and Government needed to work together to find solutions.
In 2000, the first Statement of Principles between ABI member insurers and the Government was introduced. This committed insurers to continue to provide flood insurance and the Government committed to manage the risks associated with flooding. In 2009, the Statement of Principles was renewed along with a Government commitment to a long-term flood defence investment strategy. The problem was that this agreement significantly distorted the insurance market, hindering the development of specialist flood insurance for high risk properties and creating a system where non-ABI member insurers could target only those areas at low risk of flooding. The agreement was widely viewed as unsustainable for both the insurance industry, but also for customers. Given that it was only ever intended as a short-term measure and was due to expire on 30 June 2013, a more lasting long-term solution was required.
Over three years, the ABI and Government negotiated the detail for a new scheme called Flood Re and statutory underpinning for the scheme was provided through the Water Act 2014 and associated regulations.
Flood Re
Flood Re is a world first flood reinsurance scheme. Every insurer that offers home insurance in the UK must pay a levy into the Flood Re scheme, raising around £180 million each year. Flood Re works “behind the scenes” – a customer buys home insurance in the normal way and the insurer can choose to pass the flood risk element of that policy to Flood Re for a fixed fee which is determined by the council tax band of that property. If a claim for flood damage is made, the insurer pays the claim and manages the repair process in the usual way and is reimbursed by Flood Re. Put simply, it is a dynamic scheme where there is no upper limit to the number of households that can enter it. Flood Re itself purchases reinsurance in the global marketplace and it has the power to issue a second levy to insurers if the scheme’s finances require it.
There are some important exclusions from the scope of Flood Re. Firstly, any home constructed after 1 January 2009 is ineligible given that a significant moral hazard problem arises if newly built properties were to be allowed access. Simply put, houses should not be built in areas where there is a significant flood risk without that risk being mitigated. In our view, property developers and local authority planning departments have a responsibility to ensure there is no inappropriate development in flood risk areas.
Business premises are excluded from the Flood Re scheme. It is difficult to see the public policy justification for an insurance scheme where poorer performing businesses subsidise the insurance costs of profitable businesses merely because the latter face an increased flood risk.
Flats in leasehold blocks where there are more than three residences are also excluded as these are considered commercial properties and should be able to spread the risk between themselves. They can however obtain contents insurance.
Flood Re has been a resounding success. Since it went live in 2016, almost 300,000 households have benefited from the access to more affordable insurance that the scheme provides with 64 insurers providing policies that are backed by the scheme. 93% of homeowners who have had a previous flood claim have been able to receive insurance quotes at renewal from five or more insurers (compared with 0% before) and 80% of householders with a previous flood claim have seen price reductions of more than 50%.
Future of the flood insurance market
The Flood Re scheme is scheduled to come to an end in 2039 at which point there will be a return to risk reflective pricing in the home insurance market. Unless we are to avoid a return to a systemic failure of the home insurance market for high flood risk properties, it is essential that the Government commits to a long-term programme of investment in flood defence infrastructure and maintenance of at least £1.2 billion a year.
Role of technology
Given the increasing risk of flooding we need to think more about how to live with water.
If the property insurance market is to be sustainable and affordable in the future, then action needs to be taken to ensure that we are better protected and more resilient to flood risk. Properties need to be constructed or adapted in a way that prevents flooding in the first place or makes recovery from flooding easier.
This is where technology can play a part and I am sure you will have many useful and interesting discussions on some of the latest available technologies over the coming days. From an insurance perspective, the creation of technologies that reduce the devastating impact of flooding is welcome and insurers will always seek to take account of these measures. However, their effectiveness needs to be demonstrated. Important factors for insurers will include confidence in reducing the scale of damage, the competency of installation and ensuring resilience measures are properly maintained, where required.
In the UK, a voluntary Property Flood Resilience Code of Practice has recently been launched which aims to help improve standards of installation of property flood resilience measures for professionals and communities. Compliance will be a good first step in providing insurers confidence that the resilience measures installed at a property will make a real difference in reducing the impact of flooding.
Conclusion
So in conclusion, I hope in these short remarks I have been able to provide you with the experience of the UK insurance industry on some of the challenges we have faced in the recent past in terms of significant flooding events but also how the insurance market has responded to those challenges. In the context of climate change, there will inevitably be further challenges to face, but I am confident that we are well placed to continue to serve our customers in the years ahead.
Thank you.
[1] Long Term Investment Scenarios, Environment Agency 2014.