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Flood Defence Flooding
The impact of the ending of the Statement of Principles:
what next? L
ast month’s horrendous flooding, which struck large parts of England and Wales with devastating effects, together with warnings that Britain faces the worst flooding for a decade has once again ensured that flooding is top of the news agenda. However, many residential and commercial property owners are still unaware of the risks and have no measures in place to protect against flooding.
Despite currently being the middle of summer, the UK is in a state of high flood alert, with the Environment Agency (EA) putting in place 53 flood warnings and 175 flood alerts across the country. Whilst Brits have always made light of the ‘British summer’ and blue skies, sunshine and warm weather have never been guaranteed, UK weather patterns over recent years have become undeniably more extreme, with intense and prolonged periods of rainfall as likely to fall in the summer months as during the winter. Who can forget the fateful summer of 2007 which saw many parts of the country under water? We can no longer simply say ‘I live nowhere near the coast - it won’t happen to me’; the recent flooding which occurred in Wales took place in some areas that have not flooded in over 80 years. Flash flooding is the most frequent type of flooding in the UK and, as currently demonstrated by the rainfall throughout the country, homes do not need to be near a river or the coast to be affected; it can happen anywhere to anyone.
Insurers are presently steeling themselves for the biggest insurance pay-outs for flood damage since the £3bn bill following summer 2007;the ABI is anticipating figures to be in the low hundreds of millions although the exact amount cannot be confirmed until the flood water recedes - and with rain forecast throughout July and August, there’s no telling when this will be.
The ending of the Statement of Principles
At the moment, insured property owners should receive an insurance pay-out – but what will happen after the Statement of Principles comes to an end next June?
30th June 2013 will see the ending of an agreement between the insurance industry and the Government which committed insurers to continue to provide flood insurance for most homes and small business premises, even in areas of significant flood risk, provided there were plans, within five years, to reduce the risk below ‘significant’, i.e. the Environment Agency’s benchmark for a level of flooding 1 in 75 years.
The Government, however, cut back its expenditure on such flood reduction measures and, when the Statement was last extended in 2008, the Association of British Insurers (ABI) stated that it would not be renewed again when the current agreement expires at the end of June 2013.
The Statement of Principles only applied to existing insurance companies that supplied flood insurance; new insurers to the market were not bound by the agreement and could therefore elect to only offer flood insurance to properties outside a flood risk area. By being less exposed, they could offer lower premiums and therefore win business at the expense of others. As a result, the ABI declared they would return to ‘risk-based’ pricing following the end of the Statement of Principles next year unless they and the Government come up with an alternative.
Post-June 2013, Will people be able to obtain flood insurance?
Due to annual policies, the cost of flood insurance has already started to reflect a
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property’s risk and this will accelerate when the Statement expires. Properties with significant or high flood risk are likely to find that their premiums or excess increase or that certain conditions are imposed on cover. I have learned of several homeowners whose insurance has increased by two-thirds and the excess amounts are around £15,000-£20,000 – and they are among the lucky ones; once the Statement of Principles expires, those at greatest risk may not be able to obtain flood cover at any cost.
Added to this, where flood insurance is not available, the property owner may be in breach of their mortgage which generally requires insurance cover for all perils.
So, what next?
As it stands at the moment, the future of flood insurance could go in one of two directions. One option is a 'free market', where policy holders would be charged according to the level of risk at which they are deemed to live, which could mean that the cost of flood insurance would rise substantially. Alternatively, and favoured by the ABI, the risk could be pooled (called 'Flood Re') by the insurance industry; should a large flood occur and the ‘pool’ wasn’t big enough to pay out, the Government would become the insurer of last resort.
The future of flood insurance hangs by a very thin thread. Despite the Secretary of State for the Environment, Caroline Spelman, revealing earlier this year at the annual ABI property conference that intensive discussions between the Government and the ABI are taking place and that an announcement would be made in the spring, a solution is yet to be reached and no announcement has been forthcoming.
Encouragingly however, it was made clear that the Government is fully aware of the risks to households and the devastating impact that floods can have, and that they are committed to doing all that they can in partnership with the insurance industry to address the needs of home owners. The idea that insurance and financial support would not be available to those at risk of and who have suffered flooding was deemed unacceptable.
By Mary Dhonau, Chief Executive of Know Your Flood Risk
and multi-time flood victim
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