After the deluge

Flooding has plagued society since the Biblical era and the days of Noah and his ark. But if the last six years are any indication, it is now a changing and developing risk that stands to saturate the insurance industry with ongoing claims and defence-funding battles with the government.

The June and July floods showed that new forms of risk management and flood defences will be vital to contend with the changing environment. It’s also apparent, whether insurers admit it or not, that an overhaul of how the industry covers flooding is needed.

Lessons were learnt from this summer’s floods, but the bone of contention remains public funding, with the government promising just over £2bn in its recent Comprehensive Spending Review: less than the industry demanded, and to be delivered more slowly than it needs.

The ABI estimates that this year’s flooding has cost the UK market about £3bn, a conservative estimate by some accounts. In the devastating aftermath, most commentators were quick to commend the industry on its fast-acting approach and contact with claimants.

Some, such as Norwich Union and AXA, used the flooding as a reason to call for property rate increases, pointing that while claims inflation has been on the up, rates have been moving backwards. Others used the occasion to demonstrate the integrity of their underwriting, claiming they would have no need to increase rates in the face of flooding.

While it’s clear the 2007 floods weren’t severe enough to cripple the UK industry – during the recent Insurance Times Flooding Question Time, the ABI’s Swenja Surminski said there have been no financial difficulties arising from the floods – the question most should be asking is, what happens after the next deluge? How prepared are insurers and their finances for the next catastrophe?

Insurers have some tough questions to ask themselves and the answers are going to require more than just industry rhetoric.

In August the ABI said that if the government failed to pledge enough cash for flood defences, the industry could have to consider its agreement with government to offer cove to existing properties in flood plains as long as the government offers adequate flood defence and risk management – known as the Statement of Principles.

There are 500,000 homes in high-risk flood zones in England and Wales not defended to the ABI’s standards. In response to the disappointing Comprehensive Spending Review, the ABI has warned that the next meeting over the Statement of Principles could be “heated”. But to date, it has stopped short of saying coverage will be removed from those living in the high-risk zones.

It would be well within the right of insurers to price people out of the market or withdraw coverage given that the agreement with the government is based on the probability that flooding will occur once every 75 years. New realities and climate change show that is no longer the case and 15% of homes built in the flood plains now face a far greater risk.

It has been said that this summer’s floods were a one in 200 year event. But many in the industry, including AXA’s chief executive Peter Hubbard, believe it will become more of a one in 20 year event as the effects of global warming worsen.

According to a presentation Hubbard gave to a group of MPs recently, AXA has subsidized customers in higher risk areas by about £42m because those homes are not being charged a premium commensurate with the risk.

AXA’s claims director David Williams said it stands to reason that other insurers are paying even more to subsidize customers, when you consider AXA has only about 5% of the housing market.

The playing field has changed and insurers know it, but most are worried abount unilaterally forcing a change that could have severe PR implications.

Some insurers have called for raising excesses while others have said that homes situated in flood plains should be charged higher premiums than those in low risk areas.

Insurers have also called on the government to ban the building of homes and businesses on flood plains, a move that, given the lack of available space in the UK, is unlikely to happen.

Some tough decisions are going to have to be made, beyond just lip-service, to analyze how the insurance industry responded to the 2007 flooding and how prepared it is for future catastrophes. These tests go far beyond how quickly insurers responded to claims and how fast loss adjusters turned up on doorsteps.

Not wanting to unleash a public relations nightmare, it’s likely many insurers are playing a waiting game, hoping their peers will pave the way by either withdrawing cover or increasing premiums on high-risk homes.