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.
