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Flood Insurance Dilemma

Recent losses in the insurance industry, coupled with complaints from policyholders living in floodplains about obtaining cover continued to appear in the media. Yet, with the imminent expiry of the Statement of Principles in July 2013, the insurance industry and the Government have still not resolved the issue of the affordability of home insurance policies for people living in floodplains...

Many people are divided on whether climate change actually exists. However,

few would doubt that our weather has becoming more and more extreme over the

last few decades. Major climate related catastrophes have been mirrored here in

the UK by an increase in the ferocity and frequency of unusual and extreme

weather patterns. In the last two winters we had two of the coldest on record.

Last summer, we all saw dreadful flooding throughout southern England on our TV

screens. This winter it has been the mildest of record. As a result, there has

been a huge increase in the quantity and value of weather related

insurance claims made

by home owners and businesses located in flood zones.

The ongoing negotiations between the insurance industry and the Government

have stalled - leaving uncertainty and concern for hundreds of thousands of

people who are statistically living in a flood zone. The Statements of Principle

drawn up by the Association of British

Insurers back in 2008, made it clear that the industry will continue to

provide flood

insurance cover up to June 2013. Specifically, this cover will only be

provided if the annual chance of flooding is less than one in 75. Unfortunately,

as more and more homeowners have experienced severe flooding damage, the volume

of claims have created huge losses for the insurance industry. Consequently, the

large insurers have failed to commit to continue to provide a firm commitment to

provide cover for people living in floodplains after June 2013. The likely

effect of this will be a huge increase in the value of insurance premiums for

people living in flood zones.

The argument from the insurance industry's perspective is that; why should

they insure huge volumes of people when they are reasonably certain they will

make financial losses. The argument from the Government is that such an enormous

volume people cannot be left uninsured while the insurance industry cherry picks

just the profitable risks for people not living in flood affected areas. The

argument centres around overall profits. Recent Global insurance losses have

focused on actuarial calculations and shareholders attitude towards risk. The

increasing claims from disasters will mean that the cost of insurance for

everybody is bound to rise in the future. If the 'pool of the many' is not big

enough to pay for the 'claims of the few', insurance companies may walk away

from the negotiation forcing the Government to legislate around the problem.

If people buy homes overlooking rivers or the edge of cliffs in coastal

areas, it can be easy to argue that these people knew full well there was a

higher than average chance that their homes may flood in the future. However,

there are huge numbers of less easy to quantify risks. Many homeowners have

expressed dismay that the floodplain maps used by insurance companies is simply

incorrect - and that their property has never flooded. Many of these people have

seen huge increases in their premiums as insurance companies try to recoup their

losses. Despite living near rivers or coastal areas, there is huge number of

people who are suffering from increases in their premiums, despite the fact they

have never made an insurance claim on their homes or business related to

flooding.

If the principle of the pool of the many pays for the claims of view is to be

upheld, we would hope that the ultimate negotiation results in a win-win

situation. On the one hand, it is perfectly reasonable for any commercial

insurance company to want to make a decent profit. On the other hand, it seems

blatantly hypocritical that just because it's easy to identify loss-making risks

by geography, that the principle of pooling can be ignored - leaving so many in

such a dire situation. Despite the anti-business sentiment in the UK, it should

be noted that the long-term profitability of the insurance industry is vital, if

claims of all descriptions or geographies can be paid out. Homeowners, must

surely realise when they purchase a property in a high-risk area that is there

is a reasonable chance it may flood. Indeed, the ABI's own circular made it

clear that builders should point out to homebuyers whether or not a property for

sale will be insurable in the present conditions.

While large insurance companies that cover the whole of the UK have a large

number of risks spread across wide geographic area, many local brokers do not

have this luxury. So for regional insurance brokers with large clusters of risks

in flood zones a dangerous commercial outlook may lay ahead.

One area where many commentators strongly impressed their opinion upon

Government is in the area of house building. It is possible that if negotiations

between the insurance industry Government breakdown, part of any legislated

program may involve forcing homebuilders to avoid building homes on floodplains.

Increases in population and cuts in local authority spending on maintaining

local flood defence infrastructure, will also become key issues. There has been

an increase amount of flooding from surface groundwater as more and more

residential areas are built in the middle of flood zones. Unfortunately,

millions of people are proactively choosing to live near coastal and riverside

locations to improve their lifestyle.

The Government will also have do take into account wider economic factors. It

is highly likely that mortgage providers will turn down mortgage applications

where the applicant could not prove they have secured

building

insurance. This comes at a disastrous time when the cost and availability of

credit across all sectors of the economy is being squeezed. Without mortgage

finance, the property market will continue to stall and the economic shoots of

recovery fade away. For existing homeowners in flood zones, they may see the

value of their homes fall - as potential buyers will know that they will not be

able to secure their own

home contents

insurance policy at a reasonable rate. For insurance companies, it is likely

that once the SoP expires, they will make changes in their home insurance policy

wording. Insurance companies may want to make a condition of the risk that new

applicants make building alterations to their homes, to minimise the financial

damage caused by flooding. These changes may also include greater excessess and

wider number of exclusions in the policy wording.

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