Against a backdrop of exploding costs, the insurance industry is battling great uncertainty as flood risk insurance approaches a critical juncture. In two years’ time the current Statement of Principles on the Provision of Flood Insurance, an agreement between the Association of British Insurers (ABI) and the government, is due to expire. When it does, a sustainable arrangement to safeguard the availability of flood insurance must be put in place.
The Statement binds insurers to offer flood insurance to homes and small businesses where the risk of flooding is lower than a 1 in 75-year event and where the property is already insured. But come 1 July 2013, the insurance industry wants to see more commitment from government on investment in flood defences before it commits itself any further to providing flood cover.
Will insurers still be prepared to underwrite businesses, and will it still be commercially viable for them to do so? According to ABI figures, insurers have paid out £4.5 billion over the last decade to customers whose homes or businesses have been hit by flooding in the UK. This is up 200 percent on the £1.5 billion paid in real terms in the previous decade.
Back in 2007, the UK was home to the world’s largest insured catastrophe losses, with two heavy floods in quick succession. For a brief period, UK flooding was at the top of the international insurance news agenda and the market rushed to scrutinise participants on their programmes.
Under the Statement of Principles, insurers are committed to continue insuring properties at a significant risk of flooding subject to certain conditions. However, the ABI estimates that, of those properties insured within areas of significant flood risk, 78 percent pay less than they would if flood risk were more accurately reflected in the price. On average, home insurance for those at significant risk of flooding is underpriced by 165 percent (£430) and in some cases by 500 percent or more.
Of course, insurers could always opt to exclude flood risk cover, but where’s the growth strategy in that? Can companies realistically afford to withdraw from what is ultimately a substantial line of business?
The industry is currently undergoing phenomenal changes on several levels, capital and demographic to name but two. A few years ago, everyone in the industry had a future strategy, but few seem to have a vision for 2015-2020.
It’s therefore essential that a suitable arrangement with government is reached. The debate began some time ago, gaining momentum at the ABI last summer. But you wonder if it’s being taken seriously yet at government level. It’s not just individuals and the retail market that is affected, it’s also infrastructure, something that Whitehall definitely needs to worry about.
Withdrawing cover would have massive repercussions. The damage it would do to the housing market is unthinkable, not forgetting the impact it would have on the insurance industry’s public reputation at a time when attitudes towards the financial services industry are less than positive.
Two years may seem a long way away, but action needs to take place now, with government, insurers and consumers working together to develop a model for the future of flood cover.