Proposed British home flood insurance program ‘may prove to be unsustainable’

A proposal by the British government and the Association of British Insurers (ABI) to mandate the provision of flood coverage at capped rates to certain high-risk property owners might be unsustainable in the long term, a new research paper suggests.

The London School of Economics announced Monday the publication of a paper that warns that flood risk in Britain “is expected to increase due to climate change and continued development of floodplains for residential and commercial property …”

The paper was published by the Centre for Climate Change Economics and Policy and the Grantham Research Institute on Climate Change and the Environment in response to a consultation by the British Department for Environment, Food and Rural Affairs (DEFRA).

The paper claims that a previously-released “impact assessment” of the Flood Re scheme  “does not mention the effect of climate change.”

On June 27, ABI and the national government announced the first step towards Flood Re in the form of a Memorandum of Understanding (MoU) between the carriers and the government to develop a not-for-profit flood fund. ABI, which has more than 300 member firms, says it accounts for 90% of the U.K. insurance market.

Flood Re is intended to cap flood insurance premiums by linking them to the bands of Britain’s Council Tax, which is based on property values. The proposals in the MoU, described at the time as an agreement in principle, “will be given legal backing through the Water Bill …  and will last for at least the next 20 years,” the government stated in a press release.

The Water Bill, which passed first reading in June in the House of Commons, was sponsored by Owen Paterson, Secretary of State for Environment, Food and Rural Affairs and the Conservative MP for North Shropshire.

If passed into law without amendments, the Water Bill would give DEFRA the power to make regulations “in connection with the provision by insurance companies of insurance cover against the risk of loss of or damage to premises and property within them due to flood, where the premises are household premises subject to high flood risk.”

According to ABI, Flood Re would “provide a fund to offer people at high flood risk who might otherwise struggle to get affordable flood insurance with cover at a set price,” and carriers would “put into the fund those high flood risk homes they feel unable to insure themselves,” with a cap on premiums.

In order to fund Flood Re, all home insurers would be subject to a levy of about £10.5 per year on all home insurance policies. As of Aug. 19, a Pound was worth about $1.62.

The London School of Economics noted Monday that the levy proposed last June would provide Flood Re with an estimated £180 million per year, “which the ABI considers is equivalent to the total implicit subsidy from existing policy-holders to cover claims from the 500,000 homes at most risk of flooding.”

But the paper published Aug. 19 noted that the U.K. Climate Change Risk Assessment, published last year, “indicated that the number of residential properties in England and Wales exposed to a significant risk of coastal or river flooding could increase from 370,000 in 2008 to between 450,000 and 800,000 by the 2020s (assuming no new buildings), and between 500,000 and 1.5 million” by the 2050s.

“The design of the Flood Re scheme, which is expected to last until at least 2035, has not taken into account adequately, if at all, how flood risk is being affected by climate change,” according to the paper. “For this reason, it is likely to be put under increasing pressure and may prove to be unsustainable because the number of properties in future that will be at moderate and high probability of flooding has been significantly underestimated.”

The MoU signed last June proposes that under Flood Re, caps on premiums would start at £210 per year for those in Council Tax bands A and B. Caps would rise to £540 for those in Band G. Property owners in band H in England (and the equivalent Council Tax bands in Scotland, Wales and Northern Ireland) would not be eligible.

Until Flood Re takes effect, ABI said at the time, British carriers will voluntarily “continue to meet their commitments” under the Flood Insurance Statement of Principles, although those agreements actually expired July 31. Flood Re is designed to replace those statements of principles, which ABI has with the governments of England, Scotland, Wales and Northern Ireland.

They guarantee, among other things, that carriers will renew existing home policies “if their country’s national body considers their properties to not be at significant risk of flooding” and will renew policies of property owners “whose properties are considered to be at significant risk of flooding, as long as their country’s national body plans to reduce the flood risk in the area below significant within five years.”

The LSE research paper claims the Flood Re MoU does not give enough consideration to how it would “complement Government action on flood risk management.”

The statements of principles, on the other hand, had “links between flood insurance and spending on flood defences, improvements in planning regulations, and access to flood risk information,” the LSE paper added. “It is not clear whether the new Memorandum of Understanding between the Government and insurance industry will strengthen these links.”

Flood Re is designed to cover losses up to those expected in a one-in-200 year flood and will not apply to homes built after Jan. 1, 2009, in order to discourage “unwise building” in areas at risk of flood..