Why insurers are hesitant to pull commerical cover in high risk areas
In the aftermath of the summer’s devastating floods that cost the industry £3bn, many insurers have been reluctant to discuss whether they will look at pulling cover or introducing excesses in high risk zones.
Perhaps it’s felt to be insensitive while some flood victims are still living in caravans to talk about increasing premiums or doing away with cover all together.
What many insurers have chosen to do instead is sit back and wait for the conclusion of the review into the Statement of Principles along with the findings of the government’s 'lessons learned' review currently conducted by Sir Michael Pitt.
Cutting cover can be an extremely complex matter with serious PR ramifications and what insurers seem to want is industry guidance – perhaps because there is safety in numbers.
The area that is more complex however, deals with commercial property. Unlike residential, there are no Statement of Principles compelling insurers to continue offering cover to large commercial property as long as the government provides adequate flood defences.
And yet, when it came to the summer floods, commercial property was an area where insurers were hit hard.
Allianz chief executive Andrew Torrance announced during the release of the company’s quarter results that this year’s weather-related catastrophes cost the company a commercial loss of £59.34m. Torrance also used the occasion to express the need for commercial rates to be raised overall
He said: “We’re not making adequate profit on commercial lines and we’re not getting enough premium on the exposure.”
The case would be similar for a lot of other insurers and yet there is a reluctance to consider cutting commercial cover in flood zones or introducing excesses for that matter.
David Crichton, professor at the Benfield Hazard Research Centre, said pulling cover is an incredibly complex issue.
He said: “There are all sorts of ramifications if you pull flood cover. Banks and mortgage lenders wouldn’t stand for it. At the end of the day, it seems unfair to penalize existing businesses just because they have a claim.”
The more logical step would be for insurers to begin looking at new business set up in high risk areas against the Enivironment Agency's advice.
He said: “Under those circumstances insurance companies have no obligation to offer cover.”
There is also the concern that business owners may not be aware that the property they are purchasing was built on a flood zone, against the advice of the EA.
Chrichton said an option might be to adopt a system similar to Scotland and Australia where local authorities are required to post signs stating whether a development is in a flood risk zone.
Such a move might prevent people from setting up businesses in those areas.
