State must pay more for flood protection to avoid ghettos, say insurers

Greater attention to social justice, with state support, is needed in the UK to prevent properties, businesses and whole neighbourhoods becoming uninsurable for flood risk, say insurers and NGOs.

At yesterday's National Flood Forum Conference, The Joseph Rowntree Foundation is calling for fairness and solidarity to be put at the heart of the coming review of flood insurance in the UK, arguing that a purely market-based approach would threaten to leave many thousands of properties uninsurable, leading to extensive social blight.

According to the Association of British Insurers, which is echoing the appeal, some 200,000 households may become uninsurable after June 2013, the date when there will be a fundamental change in insurance, as the current agreement of principles between the Government and the industry to manage risk and cost comes to an end.

Claims on insurance in high-risk areas have tripled in the last decade. The 2007 summer floods in England and Northern Ireland cost the economy more than ￡3 billion, and the Cumbria floods in 2009 resulted in ￡100s millions of damage, the loss of twenty road bridges and long term disruption for local communities.

The JRF is warning that a purely market-based insurance system covering flooding, that requires individuals to pay higher premiums that fully reflect their risks, will leave uninsurable many low-income properties that are vulnerable to flooding.

The coming changes to the insurance regime will have particular implications for the poor and disadvantaged because they are least able to move and afford higher premiums.

At stake is who pays for flood protection: the Environment Agency has previously projected that its flood risk management budget would need to increase by 9% between 2012 and 2015 to maintain adequate flood defences.

But instead, its budget for flood risk management has been cut by 10% during this period, according to the Public Accounts Committee, due to Defra's enthusiastic response to the Spending Review.

￡3.5 billion a year

The UK Climate Change Risk Assessment, published in January, puts flooding at the top of the list of climate change risks, especially noting the risk of flooding to high-value agricultural land, with farmers finding difficulty in obtaining insurance cover.

It says that flooding could cost between ￡1.5 billion and ￡3.5 billion a year by the 2020s, rising to ￡6.8 billion by the 2050s, and "would affect people’s homes, the well being of vulnerable groups in society, the operation of critical infrastructure systems, such as transport, energy and water supply and disrupt a wide range of businesses located in the floodplains".

These areas are likely to be widespread, especially in England, raising the possibility of whole neighbourhoods in which homes are unsaleable and uninhabitable, the Association of British Insurers has warned.

Speaking at the National Flood Forum Conference, James Dalton, the ABI’s Head of Property Insurance, said that “we are running out of time to ensure that people in high flood risk areas can continue to get affordable flood insurance when the Statement of Principles expires in June 2013.

"It is widely recognised that the current industry agreement with the Government is unsustainable, has thwarted choice for consumers, and is well past its ‘best by’ date.

“No action is no option," he said. "Insurers are determined to do everything possible to ensure that flood insurance remains as widely available to our flood vulnerable communities. But this cannot be achieved without Government help, as happens in other countries.”

Risk of ghettoisation

If businesses such as shops and light industry, frequently located in industrial parks on floodplains, find it impossible to obtain flood insurance, it could results in them relocating elsewhere, increasing a trend of depopulation or ghettoisation warns the Joseph Rowntree Foundation.

Furthermore, says the JRF, given that many who work in essential services are amongst the low paid, it would not be socially beneficial if they did relocate.

The ABI estimated that as a result of the 2009 Cumbria floods, 8,000 business premises had been affected, and, in June 2009 there were 35,000 insurance claims by businesses associated with the summer 2007 floods, far exceeding the number of commercial properties that were reportedly flooded.

The CCRA estimates that the costs due to flooding to businesses could increase in the future by approximately 75% in the 2020s, 140% in the 2050s and double in the 2080s.

The CCRA report says there are ‘orders of magnitude’ of deprived people affected by flooding in different parts of England and Wales, and quotes the Environment Agency saying that this pattern is projected to change and regional “deprivation hotspots” may emerge starting with the north east of England, where 100,000 properties will be at risk by 2050, and then followed by the north-west, London and Wales.

Since these areas also contain a high proportion of social deprivation, this underscores the severity of the risk.

Annex B of the CCRA's Evidence Report, quotes a survey (Tunstall, 2007) which confirmed this: that "those respondents living in vulnerable properties scored significantly higher on measures of general health, subjective severity and subjective stress".

Flood insurance in other countries

The ABI is asking: why should Britain be different from other countries?

"The UK is unusual in having the majority of domestic and business flood damage borne through a competitive insurance market, albeit with a history of cross-subsidisation between policy holders," says Defra's Water for Life (The Water White Paper).

The JRF and ABI are arguing that we should take a leaf out of other insurance regimes in other countries, by letting the state help the vulnerable. For example:

• In France, Belgium and Spain insurance is provided through a partnership between the state and the insurance industry, which collects a compulsory premium for natural disasters that is standard in policies and charge regardless of the level of risk. The state guarantees payments.
• In the Netherlands, flooding is typically excluded from policies, and the state is responsible for losses due to floods which are not covered by private insurance.
• In Iceland a public insurance company is responsible for a compulsory insurance regime for all natural disasters, while in Germany major flooding is coloured mostly by public compensation packages.
• Over in the USA, catastrophic flooding is usually excluded from private insurance policies for high-risk areas, instead being covered by a federal programme. In 'Special Flood Hazard Areas’ insurance is offered to those in communities which are part of the program, conditional on those communities of adopting flood mitigation and adaptation schemes.

Defra’s final report on flood insurance, Flooding and insurance: a roadmap to 2013 and beyond, published in December, outlines a number of principles to govern future flood insurance.

These include the wide provision of insurance cover for flooding, and that premiums and excesses should reflect the risk of flood damage to the property insured, taking into account any resistance or resilience measures.

Defra also wants provision to be fair, but at the same time not distort competition between insurance firms, as well as encourage investment in flood risk management activity; this would include direct Government investment.

Together with the Environment Agency, ABI and BIBA, Defra is still working out how to develop understanding of how a ‘standard of protection’ could be specified for property-level measures, and how any measures taken by householders or businesses could be taken into account by insurers.

For example, the Environment Agency accuses insurers of simply replacing damaged structures as they were before, returning them to their previous state, instead of, for example, making them more flood-proof.

Clarifying these issues is partly the purpose of today's conference.

Who pays for flood protection?

But the Joseph Rowntree report asks whether an insurance regime can really be fair and equitable to everyone, wherever they live, while being risk-sensitive?

Implicit, is the question of who should foot the bill for flood protection. The most vulnerable in society cannot be expected to do so.

The JRF contrast the situation in England with that in Scotland where, despite higher rainfall, communities face substantially lower flood risks.

While 5 per cent of Scottish households are at a 0.5 per cent flood risk in Scotland, 23 per cent of households in the England face a higher 1.0 per cent risk.

This is due to greater state intervention and regulation, which is what the JRF and ABI are calling for in England and Wales.