Availability and Affordability of Insurance
When the first draft of the new planning guidelines (PPG 25) for England was published in the summer of 2000, the author and the ABI argued strongly for tighter control of planning procedures. Property developers, and the pressing need for more houses in Southeast England , clearly had a stronger influence, despite the floods in the autumn of 2000. The contents of the second draft of PPG 25 in February 2001, were disappointing for insurers. While some of the representations had been taken on board, the draft guidelines would still allow planners to permit new housing developments in high flood risk areas if there was nowhere else to build.

Property developers were no doubt delighted, but some insurers realised that their guarantee could not be sustained under such conditions. Shortly afterwards, the ABI announced that its members would not be prepared to maintain the guarantee after 2002 unless planning guidelines were tightened up and more was spent on flood defences. In the meantime, insurers were free to start increasing premiums to more realistic levels. This statement went largely ignored by the Press and indeed the Government, even after some insurers "jumped the gun" and quietly stopped accepting new business in flood hazard areas. In July 2001, John Greenway, MP, the chairman of the All Party Parliamentary Group on Insurance and Financial Services, wrote to the ABI to complain that some constituents had suffered from increases in premium of up to 250%.

If insurers were to withdraw insurance cover on a large scale, the Press and Government would find it hard to ignore the implications. According to the Environment Agency, five million people in England and Wales are at risk of flooding. They could all be affected by premium increases, with thousands being unable to obtain home insurance at any price. As home insurance is a requirement for a mortgage, mortgages could become more difficult to obtain. Without insurance, will mortgage lenders refuse new mortgages? Will they foreclose existing mortgages? Will whole estates of new houses become blighted and abandoned?

The Council of Mortgage Lenders' Deputy Director General Peter Williams was quoted in a recent press release as saying: "The ability to obtain insurance at a reasonable cost is a key requirement for both lenders and borrowers. Without the protection of insurance, the lender's security in the property is threatened, making it virtually impossible to obtain a mortgage." (Author's emphasis).

The household insurance market used to be highly competitive, which is one reason why the total annual written premiums for household insurance in Britain have stayed so stable in recent years. In 1994, the total household and domestic All Risks premium income for all ABI members was £4,871m. In 2001, it had only increased to £4,980m. Typical premiums have actually fallen significantly in real terms despite increasing sums insured due to greater wealth and inflation. Average premiums are shown in the table below, along with average motor premiums for comparison:

Table 5: Average household premiums change compared to average motor premiums. Source: AA Premium Index (Cited in Insurance Times, 10 October 2002 )

It would appear that we spend more on insuring our cars than our homes, and in relation to the size of the investment, it is likely that the market could probably stand a considerable increase in premium in flood hazard areas without a major loss of business. It is true that motor insurance is compulsory, but for those who have mortgages, home buildings insurance is effectively compulsory too.

Analysts such as Datamonitor suggest that the average contents and buildings insurance premium will rise from around £300 in 2002 to £330 in 2003. But the two million owners of properties in flood hazard areas who are already paying an average of £600 a year could see this rise by at least an extra £180, with flood excesses as high as £25,000.

If insurance and mortgages become harder to obtain in flood hazard areas, this could have a major impact on property values. The Royal Institution of Chartered Surveyors estimate that even where insurance is available, house prices may have to be discounted by 20% to 40% in areas where flooding has occurred.

UK house prices in 2002 are going through their fourth boom in thirty years, nearly doubling since 1996 for the UK as a whole and 2½ times their level in 1996 for London . Part of the explanation of the upward trend in house-price to income ratios in the south of England lies in the continuing housing imbalance there. However, according to Cambridge Econometrics this is not enough to allow the current speculative housing bubble in the south of England to be sustained.

Cambridge Econometrics expects an increase of 200,000 households per year in the UK over the next decade, with over a million more households in the south of England ( London , the South East, East of England and South West) by 2010. They say, "this fast growth in the south is driven by the continuing trends of north to south migration for work, declining household size and an increase in international migration centred on London . London , already facing the highest pressures for affordable housing is also the prime destination for international migration, which will prompt further movements out of London into adjacent regions. All of this will put pressures on existing housing supply, transport infrastructure and public services in the capital and surrounding regions."

They go on to predict that "The coming decade will see a relatively high burden of long-term debt repayments since the windfall gains from inflation that helped borrowers in previous decades are no longer likely to be available."

In the author's view, insurance and mortgage problems, even if confined to only a small proportion of houses, could burst the bubble. If so it might not just affect flood areas, but the whole country, as people start to realise that they can no longer take the availability of flood insurance for granted. Louis Armstrong, the Chief Executive of the Royal Institution of Chartered Surveyors (RICS) said recently: "Hundreds of people's lives and millions of pounds worth of property will be at risk this winter because of the failures of the planning system and inadequate defences."

While the planning guideline PPG 25 has many good points, as mentioned before, it will still allow planners to permit houses to be built even where the flood hazard is more frequent than 1 in 100 per year, if there is nowhere else to build. Some councils such as Arundel have already reached the point where the only land available is prime agricultural, conservation areas, or floodplain. Politically it is easier to use floodplain, because groups such as English Nature seem to have more power than the EA in these matters. The problem is going to get much worse.

Cambridge Econometrics, forecast that London will be short of about 300,000 homes by 2010 as the number of households in London increases faster than the number of houses. They also estimate that the overall deficit between households and houses in the south east of England will grow from 49,000 in 2000 to 147,000 by 2010, despite the construction of a million more homes by 2010. This will lead to a continued increase in pressure from Government and developers on the planning community to release land for house building. Remembering that 11% of all new dwellings built in England between 1997 and 2000 were in areas defined as at flood risk by the Environment Agency, this could mean at least 110,000 additional houses in flood hazard areas in England by 2010.

Insurers have been quietly gearing up for a withdrawal strategy, investing in better flood maps, and introducing new questions on proposal forms. If insurance cover is withdrawn it will no doubt cause much grief on the part of householders who find that their mortgages are foreclosed. On the other hand, how would posterity (and shareholders) judge the insurance industry if it continued to enable houses in hazardous areas to be built and sold by guaranteeing to provide flood cover when it knows that flooding will be increasingly inevitable? It could be argued that it is better to grasp the nettle now, if that is the only way to persuade the planning community in England and Wales to act more responsibly.

Withdrawal of insurance would have a number of serious problems for society:

Property values would reduce, and in some cases mortgages might be foreclosed leading to blight

Society has become dependent on the insurance industry to help it to recover from flooding, not only with claims payments, but also the ability of insurance loss adjusters to mobilise repair and restoration specialist companies, and provide alternative accommodation.

«back to top«