Wet, Wet, Wet

The flood waters that rose to almost Biblical proportions in the streets of Gloucester and Hull last year may have receded, but the issue of flooding remains among the most topical and damaging – politically and economically – for the general insurance sector.

In response to the cataclysmic events that led to over 180,000 claims worth in the region of £3bn, the government launched its independent (and now infamous) inquiry, the Pitt Review. Though it is not due to report until the summer, its interim report in December ran to a colossal 160 pages, emphasising the scope of the problem and the tough decisions that lie ahead for the state and the insurance industry.

There are three key questions that are posed over the floods. First, did the industry handle claims as well as it could have? Second, what steps must the sector and the state take to guard against and manage such incidents in the future? Third, is there a sustainable future for the provision of flood-related insurance?

No one disputes that the industry was stretched to its limits during the floods, but Phil McNeilage, chief executive of Cunningham Lindsey UK – and leader of this year’s Biba seminar on flooding, emphasises that the event must be seen in context. “We had two 1 in 50 year events in four weeks,” he says. “Is it any surprise that our systems were overwhelmed? We must accept that scale had a lot to do with it.”

Recently it was revealed that the authorities ‘ ‘ were investigatng 100 cases of cowboy builders who work as subcontractors for insurers in flood-related claims. In response to such allegations, McNeilage stresses: “The system didn’t fall over. We had 25,000 claims at Cunningham Lindsey alone, but we got 90% of policyholders back in their homes by the end of March.”

He adds: “The situation was a bit like an A&E ward. There is always someone who needs to be served first. Unfortunately, insurers can’t ask policyholders to book claims in advance. Local authorities couldn’t cope with the clean-up. The emergency services couldn’t cope with the clean-up. Is it a surprise that building repairers, including the insurer supply chain, remains stretched?”

McNeilage adds that even now the craftsmen are working to capacity and materials are in high demand. Like his industry peers, he argues that local authorities have an enormous role to play, but says that this service needs to be, and is being, realigned.

“Insurers have been given cause to reflect on the wisdom of a purchasing strategy of services that are delivered separately to policyholders, provided each component is delivered well. But what happens in the event of a disaster?”

Another need that has been demonstrated is that for strong technical underwriting, McNeilage says. “There is a need for timely and accurate data for underwriters. That helps to manage expectations for both brokers and policyholders.”

At the same time, however, there has been a recognition that, due to excesses of surface water, flooding can occur away from rivers and flood plains. “There are some things you cannot underwrite,” he says.

Indeed, this is a key consideration in the flooding debate. In the aftermath of the floods, the vast majority of criticism – and the calls for action that resulted – sprang from the inadequacy of the country’s flood defence network, and need for the government to up its spending on defence to £1bn a year. But, in the wake of the report into the Hull flooding in the autumn, and the interim findings of the Pitt review, that focus has shifted increasingly toward drainage, and in some cases the water companies that have responsibility for them.

“There is an appetite for insurers to take action against water companies,” says McNeilage.

“The Enivronment Agency has a huge responsibility in terms of who gets flooded. While we need to see evidence of physical measures taken, the case for improvement in flood defences has been irrefutably made.”

“The Enivronment Agency has a huge responsibility in terms of who gets flooded.

David Crichton, visiting professor at the Benfield Hazard Research Centre, adds: “Even the ABI appears to be distancing itself from its former preoccupation with concrete.” This follows comments made by ABI director of communications Alan Leaman last month when he told the Scottish Parliament it was a myth that insurers are just interested in concrete flood defences.

Crichton points out that countries that have ‘ ‘ previously focused on flood defences such as concrete walls or dams (the largest three being the US, Japan and Holland) have scaled back their efforts because they are not cost effective in a time of climate change. Instead, they have switched to flood plain restoration policies. In the UK, both flood defence management and dams remain a contentious issue (see boxes).

All of which puts pressure on the Statement of Principles, a five-year-old agreement between insurers and the government guaranteeing the provision of flood cover for existing domestic buildings on flood plains provided the government continues to invest in its flood defence programme. However, in light of the fact that England and Turkey are the only countries in Europe which still allow building on floodplains, and the government’s previous reluctance to revise its budget, the agreement is under review and is likely to change.

With the government planning to build one million homes on flood plains, there are urgent discussions to be had.

Business continuity The flood waters that rose to almost Biblical proportions in the streets of Gloucester and Hull last year may have receded, but the issue of flooding remains among the most topical and damaging – politically and economically – for the general insurance sector.

In response to the cataclysmic events that led to over 180,000 claims worth in the region of £3bn, the government launched its independent (and now infamous) inquiry, the Pitt Review. Though it is not due to report until the summer, its interim report in December ran to a colossal 160 pages, emphasising the scope of the problem and the tough decisions that lie ahead for the state and the insurance industry.

There are three key questions that are posed over the floods. First, did the industry handle claims as well as it could have? Second, what steps must the sector and the state take to guard against and manage such incidents in the future? Third, is there a sustainable future for the provision of flood-related insurance?

No one disputes that the industry was stretched to its limits during the floods, but Phil McNeilage, chief executive of Cunningham Lindsey UK – and leader of this year’s Biba seminar on flooding, emphasises that the event must be seen in context. “We had two 1 in 50 year events in four weeks,” he says. “Is it any surprise that our systems were overwhelmed? We must accept that scale had a lot to do with it.”

Recently it was revealed that the authorities ‘ ‘ were investigatng 100 cases of cowboy builders who work as subcontractors for insurers in flood-related claims. In response to such allegations, McNeilage stresses: “The system didn’t fall over. We had 25,000 claims at Cunningham Lindsey alone, but we got 90% of policyholders back in their homes by the end of March.”

He adds: “The situation was a bit like an A&E ward. There is always someone who needs to be served first. Unfortunately, insurers can’t ask policyholders to book claims in advance. Local authorities couldn’t cope with the clean-up. The emergency services couldn’t cope with the clean-up. Is it a surprise that building repairers, including the insurer supply chain, remains stretched?”

McNeilage adds that even now the craftsmen are working to capacity and materials are in high demand. Like his industry peers, he argues that local authorities have an enormous role to play, but says that this service needs to be, and is being, realigned.

“Insurers have been given cause to reflect on the wisdom of a purchasing strategy of services that are delivered separately to policyholders, provided each component is delivered well. But what happens in the event of a disaster?”

Another need that has been demonstrated is that for strong technical underwriting, McNeilage says. “There is a need for timely and accurate data for underwriters. That helps to manage expectations for both brokers and policyholders.”

“There are over 2,000 large raised reservoirs in England alone, but the risks are shrouded in secrecy.

At the same time, however, there has been a recognition that, due to excesses of surface water, flooding can occur away from rivers and flood plains. “There are some things you cannot underwrite,” he says.

Indeed, this is a key consideration in the flooding debate. In the aftermath of the floods, the vast majority of criticism – and the calls for action that resulted – sprang from the inadequacy of the country’s flood defence network, and need for the government to up its spending on defence to £1bn a year. But, in the wake of the report into the Hull flooding in the autumn, and the interim findings of the Pitt review, that focus has shifted increasingly toward drainage, and in some cases the water companies that have responsibility for them.

“There is an appetite for insurers to take action against water companies,” says McNeilage.

“The Enivronment Agency has a huge responsibility in terms of who gets flooded. While we need to see evidence of physical measures taken, the case for improvement in flood defences has been irrefutably made.”

David Crichton, visiting professor at the Benfield Hazard Research Centre, adds: “Even the ABI appears to be distancing itself from its former preoccupation with concrete.” This follows comments made by ABI director of communications Alan Leaman last month when he told the Scottish Parliament it was a myth that insurers are just interested in concrete flood defences.

Crichton points out that countries that have ‘ ‘ previously focused on flood defences such as concrete walls or dams (the largest three being the US, Japan and Holland) have scaled back their efforts because they are not cost effective in a time of climate change. Instead, they have switched to flood plain restoration policies. In the UK, both flood defence management and dams remain a contentious issue (see boxes).

All of which puts pressure on the Statement of Principles, a five-year-old agreement between insurers and the government guaranteeing the provision of flood cover for existing domestic buildings on flood plains provided the government continues to invest in its flood defence programme. However, in light of the fact that England and Turkey are the only countries in Europe which still allow building on floodplains, and the government’s previous reluctance to revise its budget, the agreement is under review and is likely to change.

With the government planning to build one million homes on flood plains, there are urgent discussions to be had.

As for commercial properties, while the focus in the media has been on the plight of homeowners the threat posed to business, especially at the smaller end, has gained ground in recent months. On this point, however, McNeilage is emphatic. “All businesses should have adequate business continuity plans, including flood. But what matters most is the business is managed well in the first place. Too many plans are untested.”

While it is clear that there are a wide range of issues on the flooding agenda, there is one point on which all stakeholders and experts are unanimous: the need for a stronger dialogue between insurers, local authorities and the EA, and the streamlining of the responsibility for flood management, geared toward the latter.

Crichton says this dialogue has already proved successful in Scotland in persuading local authorities to stop building on flood plains, and claims many insurers have reduced their rates in Scotland as a result. With there being little sign of similar behaviour in England (recent reports claimed that 100 homeowners in Hull saw their flood excess raised to £10,000) there is a danger that flood insurance in England will become prohibitively expensive, or be withdrawn altogether. Another bout of summer flooding will doubtless force the issue to a sudden conclusion. IT

As for commercial properties, while the focus in the media has been on the plight of homeowners the threat posed to business, especially at the smaller end, has gained ground in recent months. On this point, however, McNeilage is emphatic. “All businesses should have adequate business continuity plans, including flood. But what matters most is the business is managed well in the first place. Too many plans are untested.”

While it is clear that there are a wide range of issues on the flooding agenda, there is one point on which all stakeholders and experts are unanimous: the need for a stronger dialogue between insurers, local authorities and the EA, and the streamlining of the responsibility for flood management, geared toward the latter.

Crichton says this dialogue has already proved successful in Scotland in persuading local authorities to stop building on flood plains, and claims many insurers have reduced their rates in Scotland as a result. With there being little sign of similar behaviour in England (recent reports claimed that 100 homeowners in Hull saw their flood excess raised to £10,000) there is a danger that flood insurance in England will become prohibitively expensive, or be withdrawn altogether. Another bout of summer flooding will doubtless force the issue to a sudden conclusion.