In the aftermath of severe flooding in the UK for the second time this year and with insured flood losses predicted to top £1 billion in 2012, the UK government and the insurance industry are trying to find a solution to the way flood risk is covered in the UK.
The Association of British Insurers (ABI) has suggested 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 when the current arrangements come to an end in June 2013. The current agreement sees insurers cover flood risk but at a high premium and with high excess limits.
Under the terms of the new proposal, the ABI 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, according to the ABI. Negotiations between the two sides continue.
But some specialists in this field suggest an alternative solution. Neil McDermid, managing director of Total Flood Solutions, one of the leading flood defence specialists in the UK, believes the solution should instead revolve around funding adequate flood protection measures for homes. Insurance would then become less of a problem. He suggests this could be delivered through a scheme linked to borrowing against properties and administered by lenders.
“I believe the government should pressure the building societies and banks to add this cost onto the funding of properties,” McDermid said. “That way, it doesn’t cost the homeowner anything in the immediate term but the property is protected. The worst case scenario is that a flood devastates the house, they have to move out and the property is worthless. Nobody wins. Such a solution would be in everyone’s interests.”
He notes that in many countries, flood insurance is only available where flood defences are adequate. Such a policy in the UK would leave millions with no coverage – thus he believes funding the cost of defences by linking it to lending against properties could work.
Such a proposal might be food for thought for the bodies responsible for finding a solution. The UK government and the ABI remained locked in talks with the insurance body apparently frustrated by the lack of progress.
"The severe floods experienced by many areas of the UK this year are a reminder of the rising flood risk facing the UK,” said Nick Starling, director of general insurance at the ABI. “It is therefore vital that insurers and government tackle this issue together – this is not just a problem for insurers. No country in the world has a free market for flood insurance with high levels of affordable cover without some form of government involvement."
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ABI, floods, UK