Appendix 6: The "Crichton Formula": A New "Insurance Guarantee"?
(The following is based on a proposal presented by the author to the Australian Government and Insurance Industry at a conference in Canberra in 2001. During the conference a number of options were considered and the favoured option was close to the author's proposal. It was subsequently published in 2002 by the Water Research Foundation of Australia in a book of the proceedings titled "Residential Flood Insurance", edited by Dr David Smith and Prof. John Handmer. The author has adapted it as a possible way forward for the British market.)

The following is based on the assumption that Britain is prepared to make private sector flood insurance work without any cost implications for government. However, there is a case for saying that for those on old age pension, income support or other form of benefit, government should make a contribution by increasing such benefits to pay for insurance premiums.

Also grants could be given for individual flood protection and resilience measures.

This would be much more cost effective for the government than finding money to pay compensation to people after the event, and much more equitable than the present situation where 50% of such people cannot afford any insurance at all.

For a useful discussion on different types of flood insurance systems see the recent Focus Report published by Swiss Re.

The Crichton Formula

It should be noted that while this includes obligations on the part of local and national government, unlike the ABI "Statement" it does not in itself involve any increase in taxpayer funded expenditure.

Note the restrictions on the flood excess: it is inequitable to have a flat sum excess of, say £10,000, which could cause great difficulty for low-income families. In any case, the traditional purpose of an excess was to encourage the policyholder to act to avoid or mitigate losses, and there is little that can be done to avoid flooding. However, if the policyholder is fit and healthy and receives enough warning it may be possible to move contents to a safer place. If this is done it is only fair to reduce the excess in such cases, or in any case where the policyholder is physically unable to move property.

PART ONE - INSURERS' OBLIGATIONS

•  General

•  All insurers which provide property loss or damage cover under household and small business package policies (buildings and contents, including alternative accommodation and business interruption) will include cover for water damage caused by flood, storm or burst pipes, for all such policies. Those insurers will guarantee not to refuse cover on the grounds of flood risk for areas within the boundaries of those local authorities which accept the obligations outlined in Part Two of this formula.

•  For those local authority areas, the flood excess will not exceed 10% of the sum insured, but there will be no premium limit. Cover will not be refused on the grounds of flood risk unless:

•  The property owner has refused the offer of a flood alleviation scheme

•  The property has suffered flood damage three or more times in the previous five years and no additional flood protection measures have been put in place since that time.

•  For those local authority areas, insurers agree not to seek to recover flood claims costs from the local authority unless there is evidence of gross negligence on the part of the Council, or failure to ensure that all watercourses within the Council boundaries are properly maintained.

•  For buildings insurance:

•  In the event of a flood claim, the maximum amount payable will not exceed the market value of the property immediately prior to the flood. (This is to cater for properties sold cheaply due to a history of flooding in the area.)

•  In order to avoid blight, insurers will maintain cover on existing property after it is sold, subject always to the terms of this formula.

•  In the event of a flood claim, if the insurer considers future flood claims to be inevitable, it can reserve the right to:

•  pay the market value or outstanding mortgage (whichever is greater) for the property in return for the title deeds. The insurer is then free to demolish or otherwise dispose of the property. OR

•  cancel the policy unless the policyholder agrees to install flood protection measures to the satisfaction of the insurer at his or her own expense.

•  The insurer reserves the right to reinstate flood-damaged property in such a way that it will be less vulnerable to future flood events. If betterment is involved the policyholder will be liable for any additional cost (in Scotland this would not apply where resilient reinstatement is a legal requirement). However the insurer will provide a low interest loan for this additional cost in return for a long-term agreement covering the repayment period. During the repayment period, the insurer will undertake to continue to invite renewal of the insurance at a premium rate not exceeding 20% more than the rate for the previous year, and will continue to invite renewal on this basis even if the property is sold. If the policyholder is not prepared to pay the additional cost of betterment, the insurer is released from any obligation to renew the policy.

3 For contents insurance

3.1 Any flood excess will be waived or reduced as appropriate if the policyholder can demonstrate that reasonable precautions were taken to move contents to a place of safety or otherwise reduce the loss, taking into account all the circumstances, including, but not limited to:

•  Risks to the health of the policyholder or the policyholder's dependants

•  The policyholder's state of health or fitness

•  The amount of warning given

•  Ability to readily access a place of safety.

4. Insurers shall be released from any obligations where:

•  the property is within a dam break inundation area or managed retreat or realignment area

•  the policyholder is deemed by the ABI to be unsuitable for insurance, for example due to criminal activities

•  the flood hazard is greater than 75 years for properties constructed or granted planning consent prior to 2003

•  the flood hazard is greater than the 100 year return period for properties granted planning consent after 2003

•  the flood hazard is greater than the insurance template for properties granted planning consent after 2006

•  the flood hazard is greater than the insurance template for any properties after 2010

•  the property has been identified in an ABI advisory notice as having an unacceptably high level of flood risk, for example where the EA have advised against the development

•  the local authority withdraws or is deemed by the ABI to have withdrawn from the obligations outlined in part two of this formula.

PART TWO - LOCAL GOVERNMENT OBLIGATIONS

This formula will only apply to properties within the boundary of those local authorities that have agreed to:

•  Hold at least four meetings a year of Flood Liaison and Advice Groups including representatives from the relevant environment agency, River Basin Management Board, Water Company or Authority and the insurance industry. All decisions relating to strategies for floodplain management including flood defences, planning, drainage impact assessments, flood risk assessments, and significant developments where flood hazard is a possibility, to be referred to the flood appraisal group.

•  Adopt a presumption in their planning strategies against development for cases where the flood hazard exceeds the insurance template

•  Make available to the insurance industry timely and detailed information about any proposed new residential development which breaches the insurance template so that the ABI can issue an advisory notice to insurers

•  Use its building control powers to require properties in flood hazard areas to be constructed to resilient flood and windstorm standards as laid down by the ABI in conjunction with CML, RICS, and NHBC.

•  Consult with adjoining local authorities as necessary

•  Adequately maintain watercourses and culverts using funding from a "planning gain" levy on developers, and publish biennial reports on actions taken

•  Seek SUDS solutions to drainage of surface water, and agree to adopt and maintain above ground SUDS installations, again funded by a "planning gain" levy on developers.

PART THREE - NATIONAL GOVERNMENT OBLIGATIONS

National Government to agree to

•  Incorporate flood hazards and give statutory status to Flood Liaison and Advice Groups in legislation prepared under the Water Framework Directive

•  Introduce regulations to enable local authorities to ring fence any planning gain levies to be used for maintenance of watercourses or SUDS schemes

•  Introduce legislation to require resilient reinstatement following flood or storm damage in consultation with the insurance industry and CILA

•  Temporarily relax FSA requirements on insurance companies' exposure management in local authority areas which have accepted the formula

•  Make dams subject to COMAH Regulations

•  Apply a levy on insurers to fund the introduction of the FASTER system for the collection of insurance company data on flood and storm claims and publication of analyses of these data. Require insurers to co-operate in the submission of such data, subject to confidentiality safeguards to protect personal information and insurers' competitive position.


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