The Pooling Solution
From time to time over the last few years, various people have suggested pooling solutions for flood hazard areas. A pool of insurers would take the highest hazard flood risks, and spread the risks across the market, perhaps with some form of government support. A pool reinsurance solution has also been suggested many times, on the same lines as the pool for terrorism. Such an idea has attractions:

•  Risks can be underwritten by specialist underwriters

•  Profits from the pool can be used to invest in better flood maps, and even the construction of flood defences, perhaps in a public-private finance scheme.

On the other hand there are a number of problems:

•  Any form of pool would imply a subsidy from policyholders in safe areas or from government, or both. Otherwise the premiums would be too high for many people to afford, especially in social housing areas. Such a subsidy is very unlikely to be forthcoming without some element of compulsion.

•  The return of insurance availability in high hazard areas would simply encourage more building in such areas, as would the construction of defences by the pool.

•  Property owners in such areas would be unable to shop around for the best deal.

•  Such a pool would need its own reinsurance arrangements, and global reinsurers, are unlikely to find such exposures attractive in isolation, unless a substantial premium was on offer.

While pool arrangements may work for very low frequency, high severity hazards such as earthquake, they are not satisfactory for flood hazard, where the hazard is confined to specific areas and adverse selection is a major issue.

For any kind of insurance arrangements, the basic principles of insurability must apply whether it is a pooling arrangement, or private insurers working independently. For more details, see Appendix 7.

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