Lack of flood solution a worry for UK insurers

The lack of an agreement between the UK government and insurers that would establish a new solution for the way flood risk is covered in the UK remains a big worry for insurers concerned that thousands of homes could be left uninsured against flood when the existing agreement expires in June.

That was the conclusion of a recent survey of household insurers by accountancy firm Deloitte, which asked them which issues concern them most.

“The thing that came through again and again was this issue and the fact it hasn’t been renegotiated with the government,” said David Hindley, insurance partner at Deloitte.

“Insurers are very worried about the fact that we’re in a limbo state. They are getting worried about what they’re going to do when the policies start coming up for renewal.”

From June, insurers will no longer be obliged to renew policies for households that are at a significant risk of flooding. This follows a period during which a statement of principles agreement has been in force, which means insurers are obliged to renew the policies of at-risk households, but at a high premium and with high excess limits, provided flood defences were being planned during the next five years.

The government has been implementing flood defences but in many areas this has not been achieved. In the meantime, households in low risk areas are effectively subsidising high-risk households and some insurers have found themselves covering a disproportionate number of high flood risk properties.

Hindley said that time is running out for a new agreement to be reached. The Association of British Insurers (ABI) has proposed a not-for-profit special insurance fund be formed that would fund the 200,000 high-risk households that will otherwise struggle to get affordable household insurance. But it wants the government to fund a temporary overdraft to underwrite any severe losses in the short-term – something the UK government is reluctant to do.

Hindley said the ABI’s proposal seems like a reasonable solution, if it can be negotiated sensibly. “There are enough uncertainties to cope with anyway in insurers’ minds and this is yet another problem for them. Insurers want some agreement in place, or there will be people in flood areas that can’t get insurance,” he said.

In the meantime, he recommends insurers pay close attention to the way in which they make pricing and underwriting decisions for individual properties.

“Make sure that your data on flood risk is as granular as possible so that you don’t on the one hand undercharge people who are likely to be heavily exposed to flood but also on the other hand don’t overcharge and therefore perhaps not win business. It’s all about making sure your risk selection and pricing tools are as good as they can possibly be.”