Increasing flood risk concerns UK insurers

by Kieran Cooke, Climate News Network, November 30, 2013

The UK insurance industry is struggling to cope with the increased risk of flooding events associated with climate change.

LONDON – The insurance industry doesn't like climate change. Global warming is introducing a whole new element into the business of quantifying risk – the basic function of the insurance business. One of the main challenges facing insurers is the increased occurrence of floods in many countries.

The UK is one of the world’s leading insurance centres:  a recent seminar at the University of Oxford in the UK examined flood patterns in Britain over recent years.

Not only is the incidence of flooding increasing – it is also becoming ever more unpredictable. “No business, particularly the insurance industry, likes volatility” says Matt Cullen, a floods specialist at the Association of British Insurers (ABI). “There’s no doubt there’s been a ramping up of flooding in the UK since the 1990s and this tends to spook the insurers. And the situation is only going to get worse with climate change.”

Assessing when and where flooding occurs is a highly complex business, says Professor Edmund Penning-Rowsell, of Oxford’s School of Geography and the Environment. Flooding is episodic and can also be very localised, he says: a particular area might be flooded for two years in succession and then be dry for ten years – while another, previously dry area sees the waters rise and homes wrecked.

Flood risk increasing

The ABI says flood-related costs in the UK have been rising dramatically: over the 2000 to 2010 period the industry paid out £4.5bn (US$7.2bn) to those whose homes or businesses had been hit by flooding – a 200% rise on pay-outs in the previous decade.

Under a long-standing agreement between the UK Government and the insurance industry, insurers have guaranteed that cover would be available to homeowners – even those judged to be in high flood risk areas - as long as the authorities continued to spend money on flood prevention works.

That agreement ended in mid-2013: in a move being keenly watched in other parts of the world, UK insurance groups and the Government are now trying to come up with a formula which both guarantees continuing flood risk cover for homeowners in future and also ensures the continued financial viability of the insurance industry.

Poor at greatest risk

Often, say insurance analysts, it’s the poorer in society who live in homes most exposed to flood risk. If there was a move towards a free-for-all in the insurance market, those households would either find it impossible to find insurance – or be forced to pay highly expensive premiums to specialist brokers.

The ABI is proposing setting up a new scheme called Flood Re which would provide insurance at what it says would be an affordable level for those most at risk from flooding. Flood Re would run a multi-million pound fund -- financed by a general levy on all household insurance policies -- which would cover the costs of flood claims.

The Government has given its tentative approval to the idea. However, the scheme is dependent on continuing government expenditure on building up flood defences.

According to UK government figures, about 5.2 million properties in England alone – that’s one in every six properties in the country – are at risk of flooding, either from rivers or the sea or from surface water flooding.

At present the UK is spending about £600m ($960m) per year on tackling flooding. The Government admits that, just to maintain existing flood protection levels, expenditure will need to rise by around 80% by 2035. And that estimate, say officials, does not include the cost of managing the risk of surface and groundwater flooding.