The costs of flood damage and lost productivity from flooded property and farms will be ranked in £Billions. Insurance payouts alone from the last major flooding in 2007 are estimated at £3 billion with insurers currently estimating a value in excess of £1 billion for the current floods paralysing the south of England. Add to this uninsured costs and productivity losses, in particular to beleaguered farmers whose early crops have now been underwater too long to recover, and the actual cost to individuals and, in particular, business is substantial.
In this context the Government’s offer of £10 million is a drop in the ocean. The £14 million of claims and £24 million in temporary housing costs so far paid by insurers is also little more than a start. Urgent and important as these immediate payments are, the real cost of these floods, and flooding in general must be distributed effectively and fairly on a longer term basis.
This is where the insurance market and the legal framework for distributing costs amongst the different stakeholders plays a key role. And, currently, the UK’s insurance arrangements for flooding are in transition. The insurers who have been called to Downing Street today (18 February) have in fact, through the Association of British Insurers (ABI), been in discussion with Government (in particular Oliver Letwin, who will be present today) about the distribution of flood risk for an extended period. Those discussions have led to the continuation of the former ‘statement of principles’ regarding flood insurance cover on a voluntary basis until this summer at which stage, flood insurance will predominantly fall to a new industry company ‘Flood Re’ which will be given statutory fund raising powers.
Hence the future of flood insurance, and who will pay for it, will be bound up with the structure developed between Government and the insurance industry in creating Flood Re. Flood Re works like this:
- Insurers will continue to place home insurance containing flood cover.
- The cost of the flood element of the cover will be set by the council tax band of the property (in England, there are similar provisions for Wales, NI and Scotland) rather than the actual risk of flood damage.
- The insurers, however, will then sell on the flood insurance risk to a new industry owned and managed company called Flood Re.
- Flood Re will be commercially run, however, not for profit. It will have statutory underpinning which will allow it to raise a levy from the insurers to ensure it remains solvent.
- As it will obtain a large part of its funds from levies from insurers (effectively a tax) Flood Re will be responsible to Government for the handling of such money. Nonetheless, it will remain technically a private (hybrid) organisation.
However, the new flood insurance structure featuring Flood Re, comes with a specific scope and range:
- Properties in the top council tax band (H) will not be eligible.
- Properties built after 1 January 2009 will not be eligible.
- Non-domestic properties (including small businesses) will not be eligible. In principle this includes rental property run as a business leaving tenants (who often have to contribute to buildings insurance placed by the landlord) exposed.
- Catastrophic flood events would be left to the Government.
The intention is that businesses and the owners of valuable houses will still be able to obtain flood insurance on the market. Whether that is the case and what premiums such policies will command remains to be seen.
Hence, when the waters have receded and the new flood protection provisions come into force, who will pay for flood losses?
- Homeowners with top-band properties – these individuals are likely to suffer a double hit; not only will they pay increased premiums (anecdotal suggestions are an increase in annual premium of over £1,000) but their properties could effectively become uninsurable or unmortgageable, hugely reducing their value. Equally, buyers of such properties may look elsewhere and the additional premiums may force householders to reduce their selling prices.
- The average homeowner, not on a floodplain – the cap on flood premiums and the levy on insurers to pay for Flood Re (and hence repairs to damaged properties on a floodplain) will result in an increase in other insurance premiums. Homeowners with property which is not going to flood will consequently see their policy become more expensive anyway. Such ‘safe’ properties will cross-subsidise the ‘risky’ properties.
- Businesses – insurance for losses and damage will have to be obtained from the market. The cost of this for a business on a flood plain could rise steeply (or simply be unavailable – eg for farming losses).
- Tenants – tenants sign leases that require them to pay a share of the total buildings insurance cost could be left facing substantial rises if their landlord operates on a business basis.
- The taxpayer – where floods become catastrophic public property will be damaged, Government guarantees over utilities etc, may be called in and Flood Re may decline cover. In such cases, the Government would have to step in to pay for repairs.
- Anyone who has bought a house built on a floodplain after 1 January 2009 – cover will not be capped and, if available, the market insurance cost is likely to be very high.
Someone has to pay for flooding and the industry and Government has, after substantial discussion and negotiation, agreed how the responsibilities should be met by society. It is however clear that there will be some winners and losers from the next time floods rise.