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Technical Paper 1 (1.82MB PDF)



Cover Page

The Consequences



Availability and Affordability of Insurance

The ABI Statement of Principles

Impact on Property Values

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Technical Paper 1
Flood Risk & Insurance in England and Wales: Are there lessons to be learned from Scotland? - David Crichton


The ABI Statement of Principles

On 26th September, 2002 , the ABI announced that the insurance guarantee would indeed expire at the end of 2002. It would be replaced by a "Statement of Principles" from 1st Jan uary 2003 . The ABI stated that its members would try to maintain flood insurance cover, provided the following conditions are met:

•  Flood defence spending in England meets the levels in the Treasury Spending Review

•  English planning guidelines are implemented fully (presumably only in England , although this is not stated)

•  The Environment Agency's flood asset database for England and Wales is published

•  The Cabinet Office's proposals for Emergency Planning in England are implemented

•  Consideration be given to integrated drainage management for England and Wales similar to that in operation in Scotland . (The author understands that this is a reference to the Flood Prevention and Land Drainage (Scotland) Act, 1997.)

•  Implementation of solutions to sewer flooding and adoption of water companies as statutory consultees. (Scottish Water is an authority, not a company, so presumably this condition only applies to England and Wales .)

In other words, continuation of flood insurance in Scotland and Wales appears to be dependent on what happens in England . It should be remembered that the cancellation of the flood insurance guarantee was entirely as a result of problems in England . This was despite all the hard work by the Scottish Executive and Scottish Councils since Devolution. (So far as the author knows, the ABI has never circulated their members to tell them about the different approach in Scotland .)

On 26th September, the ABI published a report to give details about the reasons for its action. (The report does not mention Scotland at all.) It says that during the last two years of the guarantee "There have been only a handful of cases where policyholders have experienced difficulties in renewing cover with ABI members."

The report outlines the ABI's new approach and this appears in the panels. (It is interesting to note that the report does not mention the complaint from John Greenway, MP, that some constituents had suffered from increases in premium of up to 250%.)

In April 2004, the ABI created a new page on its website dedicated to "flooding and insurance" issues. See: www.abi.org.uk/flooding .

The ABI's new approach

• I. Following an analysis of the Government's recent announcements, the ABI has agreed with its members a new Statement of Principles governing the provision of flood insurance for Britain 's households and small businesses.

• II. The insurance industry is responding positively to the Government's plans. The partnership approach that has brought this recent progress needs to be continued. The ABI will continue to play a key role alongside other stakeholders in securing an effective system of flood management and protection.

• III. The new arrangement has five aims:

•  full access to a competitive market for insurance for the vast majority of homeowners and businesses;

•  improved security for those who live and work in high-risk areas;

•  new provision for those who wish to sell their homes or businesses;

•  better use of new solutions to make properties insurable, even in high-risk areas where improvements to flood defences are not planned;

•  a clear incentive for Government and local authorities to continue to invest in flood defences.

• IV. The Statement of Principles is based on the Government's own target standards of flood defence. All ABI members (accounting for 85% of the household insurance market) will follow this statement.

• V. Premiums and excesses continue to be matters for the commercial and competitive judgement of individual companies. Insurers will base their judgements on their assessments of risk and likely damage levels, using information that is publicly available from the Environment Agency and others

• VI. In order for this approach to work in practice, the Government will need to provide early and accurate information on both risk levels and improvement plans. Where there is uncertainty, insurers will need to make prudent assumptions. There will need to be a continuing close partnership between Government, insurers and others to ensure an effective flood risk management process.

• VII. With this partnership in place, the new arrangement will enable the industry to fulfil its ambition, shared with the Government, that flood insurance should continue to be available to the vast majority of customers. It will encourage the development and use of innovative solutions to reduce the level of risk and cost of damage in difficult areas. It will also help to ensure that the momentum behind current efforts to improve flood protection is maintained.

• VIII. The agreement will be subject to a routine annual review by the ABI and the Government to assess progress.

Source: ABI

 

ABI STATEMENT OF PRINCIPLES ON THE PROVISION OF FLOODING INSURANCE

General Policy

It is the intention of ABI members that flood insurance for domestic properties and small businesses should continue to be available for as many customers as possible. The premiums charged and other terms - such as excesses - will reflect the risk of flooding but will be offered in a competitive market.

This statement of principles will apply from 1 January 2003 but is subject to review in the event of significant external shocks such as withdrawal of flood reinsurance. Successful operation of the principles is dependent on planned information on risk levels and investment being available from the relevant flood defence authorities.

Areas currently defended to the DEFRA standards

The majority of properties in flood risk areas are already protected to the Department of Environment, Flood and Rural Affairs' indicative minimum standard of 1 in 75 years for urban areas, or better, the level to which properties are defended above this will vary considerably and premiums will reflect different degrees of risk; but flood cover will be available as a standard feature of household and small business policies.

High Risk Areas where improved defences are planned by 2007

In a number of locations the risk of flooding is unacceptably high. Existing flood defences provide less protection than the Department of Environment, Flood and Rural Affairs' indicative minimum standard of 1 in 75 years for urban areas. Where improvements in flood defences sufficient to meet these standards are scheduled for completion within the next 5 years, insurers will maintain flood cover for domestic properties and small businesses which they already insure. The premiums charged and other policy terms - such as excesses - will reflect the risk.

If a domestic property in this category is sold the current insurer will continue to provide cover, subject to satisfactory information about the new owners of the property, especially their previous claims record.

Where a small business is sold the current insurer will consider whether to continue to provide cover; this will depend heavily on the proposed new use of the premises and the previous claims record of the new owner.

High risk areas where no improvements in defences are planned

There are other locations where the risk of flooding is unacceptably high - and in some cases they have been shown to flood frequently - and no improvements in flood defences are planned. Here insurers cannot guarantee to maintain cover, but will examine the risks on a case by case basis, use their best efforts to continue to provide cover and will work with the owners of domestic properties and small businesses which they currently insure to see what action could be taken by the property owner, the Environment Agency and the local authority, which might make the property insurable in some form. This action might include the use of accredited products, flood resilient materials and temporary defences to defend the property.

Action from Government

The implementation of these principles will depend on action from Government as detailed below with an annual review of progress:

actual expenditure on flood defences to meet or exceed that set out in the 2002 Spending Review;

implementation of the improvements in the system of flood defence planning set out in DEFRA's consultation "Flood and coastal defence funding review";

full implementation of PPG25 (Planning Policy Guidance on Development Planning and Flood Risk), with full reporting of the level of compliance by local authorities and consideration of administrative processes in the planned review of PPG25 in 2004;

the Environment Agency's flood asset database to be available to insurers by the beginning of 2003, and publicly available as soon as possible;

early improvements in the flood warning system, and implementation of the Cabinet Office's recent emergency planning review;

full and detailed consideration, including a benefit/cost analysis, to be given to integrated drainage management for England and Wales , similar to that in operation in Scotland ;

implementation of realistic solutions to sewer flooding including increased investment in improvement programmes and adoption of water companies and sewerage undertakers as statutory consultees in the development planning process.

Source: ABI

Comments on the ABI Statement

The government has so far refused to give in to insurance demands for changes in planning guidelines, although at the time of writing, a revised PPG 25 is being prepared. An increase in flood defence spending has been offered, but not nearly as much as the ABI had requested. Despite this, and no doubt under pressure from the mortgage lending industry, the ABI are effectively saying that its members will continue to offer insurance up to the 75-year return period hazard. If the hazard is higher than that, no cover may be available. Also, and this is quite significant, if an insurer provides cover on a house or small business premises, the cover will be available to anyone who wishes to buy that building, provided they themselves are acceptable to the insurance company (for example, no history of fraud or other convictions.) A similar principle already applies for subsidence problems. These measures will certainly help to maintain property values, because the buyer will be able to get insurance and therefore a mortgage.

It is interesting that so far as small businesses are concerned, the ABI Statement goes further than the 1961 guarantee. Retail shops were included in the 1961 insurance guarantee, so long as they were not part of a chain, but the guarantee did not cover other types of small business. The Statement would appear now to apply to any small business although the term is not defined.

However, the arrangements are to be reviewed annually, and therefore there is no guarantee that cover will be available in the future. Mortgage lenders will no doubt wish to take this into account. Insurance policies last for only a year, a mortgage could last for 25 years or more. If climate change increases the hazard, the insurer can walk away, but the mortgage lender could be left with worthless collateral.

There is anecdotal evidence that some mortgage lenders are now insisting on a new requirement. Not only must the insurance policy be transferred with the house when it is sold, but the buyer must also find a "back up" insurer prepared to write the property as new business if the tied insurer fails to maintain cover. In any event, some householders are anxious about being able to sell their houses in the future and are too scared about losing their insurance to make a flood claim or to complain about how a claim is handled. Meanwhile, it is estimated by the ABI that there are 400,000 houses in England and Wales that are not defended against the 100-year event. These houses would now appear to be not covered by the ABI Statement, and therefore are potentially uninsurable.

It is not clear how the decision was reached about the principle and detail of the ABI Statement. Certainly not all insurers were consulted, and it is likely to have arisen from a discussion only with the biggest insurers. This means that the whole market does not necessarily agree with the commitment made on their behalf by the ABI. On the other hand, the ABI was no doubt under great pressure from the mortgage lending industry to come up with some sort of guarantee of continued cover to prevent the collapse of property prices.

The guarantee applies only to properties where the flood hazard is lower than 75 years, but this figure is going to be difficult for insurers to assess, and it will change over time owing to the impacts of climate change. There is a very real possibility that most insurers will simply stick with the 100-year return period shown on indicative flood maps. This will leave the majors to pick up the higher hazard cases, thus concentrating such cases in the hands of perhaps five or six insurers, who will be free to charge whatever they want. This could not only lead to social exclusion issues, it could make those insurers vulnerable to a major flood event, or to intervention by the insurance regulator, and even suspicions of a cartel arrangement. While a cartel is unlikely, competition between insurers would effectively no longer exist in such areas, with householders at the mercy of their current insurer. Is this what the insurance industry really wants?

There seems to be a very real danger of a vicious circle situation arising where every time there is a flood, more and more citizens find themselves excluded from insurance and mortgages simply because of where they live. The situation is reminiscent of the inner city problems with crime insurance in the late 1970s when the government was forced to step in to put pressure on insurers to stop "red lining" and change their strategies. "Blue lining" for flood could have a similar result.

Is there a better and more sustainable way to solve the problems than issuing threats to government if they do not spend more on flood defences or comply with the rest of the seven conditions in the Statement? Has the insurance industry even attempted to address the planning issue where it matters, that is at a local level, by talking regularly face to face with the local authority planning decision makers?

This is what the author has been doing in Scotland , with some success, thanks to a positive response from the Scottish Executive and local councils. Most Scottish Local Authorities have now adopted some or all of the "Insurance Template" in their planning strategies. The template is a measure of the level of flood frequency which insurance companies would normally be able to underwrite at normal terms. In other words most Scottish local authorities will not now allow new housing to be built in areas where the flood hazard is unacceptable to insurers. The irony is that it is despite what has been achieved already in Scotland to manage flood hazards, continuation of flood insurance in Scotland and Wales appears to be entirely dependent on what happens in England . The partnership between insurers and government in England may have broken down because of government's failure to respond to insurers needs, but if the partnership between insurers and government breaks down in Scotland , it will be entirely the fault of the insurance industry.

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