Renewing the partnership –
how the insurance industry will work with
others to improve protection against floods
A report by the Association of British Insurers
Contents
1.
Background and history ................................................................................ 3
2.
The ABI/ insurance industry two-year agreement ......................................... 5
3.
The ABI’s objectives ..................................................................................... 7
4.
The ABI’s new approach .............................................................................. 9
2
1.
Background and history
i.
Unlike in most other countries, flood cover has been a standard
feature of household insurance policies in the UK since the early
1960s. In the rest of Europe, Australia and North America, this
cover is either not available or only under special conditions. The
British insurance industry was able to make this commitment to its
customers on the understanding that the Government would
provide effective flood defences.
ii.
Floods have been with us since time began. But a number of
factors are now combining to make floods more frequent, more
widespread and more costly. These include more variations in
weather patterns, including more and heavier rain, increased
development on the flood plain, more affluent lifestyles and
changing construction techniques, poor maintenance of flood
defences and drainage systems and changes in agricultural
practices. In addition, climate change is expected to increase flood
risk further in future.
iii.
Autumn 2000 was the wettest in the UK in over 270 years.
Unprecedented rainfall levels led to flooding in around 700
locations across England and Wales. Around 10,000 properties
were damaged, and a further 37,000 were saved by sandbags
alone. The insurance bill alone was over £1 billion. Government
ministers described these events as a ‘wake-up call’. It was clear
that Britain’s flood defences and systems of flood management
needed radical improvement.
What is at stake
iv.
There are approximately 21 million properties in England and
Wales. The Government estimates that, of these, around 1.8 million
homes and 130,000 commercial properties are at risk from inland
or coastal flooding in England and Wales. Together with agricultural
land that is at risk, these represent around £220 billion of assets.
v.
According to Government research, winters will be wetter by up to
30% by 2080. At the same time, summers may become drier so
risking more rapid run-off when thunderstorms occur. These trends
will add to flood and other weather-related damage if steps are not
taken now to address these risks.
The role of insurance in covering risk
vi.
Insurers have been widely praised for their quick and positive
response following the floods of autumn 2000 and since. Insurers
use helplines to give speedy advice to policyholders and, where
needed, claims and repair teams are quickly on the scene after a
flood. Insurers frequently arrange alternative accommodation and
3
give advice and assistance on protecting household contents. In
other words, insurers don’t just pay claims, they provide an
effective back-up service as well.
vii.
Insurance enables householders and businesses to minimise the
financial cost of damage from flooding. In the modern competitive
insurance market, the old tariff pricing system has been replaced by
risk-based pricing where good information is available on risk levels
– for example on local crime levels, or on the fire hazard of specific
house construction types. This enables insurance to be offered at
very competitive prices to customers living in low risk areas.
viii. The higher the risk of a loss or damage occurring, or the more
costly the damage, the higher the premium that insurers need to
charge. Where events causing damage become too frequent or
when the likely repair bill is too high, insurance may have to be
priced at a level that puts it beyond the reach of many
policyholders. A relatively small but still significant number of
properties in the UK have always been uninsurable, simply
because the risk of flooding has been too high.
ix.
While insurance provides welcome peace of mind, and essential
finance once a flood has taken place, it cannot remove the trauma
and misery of the experience of flooding. While insurance can and
does play a very positive role, it is much better for customers and
the public interest if the risk of flooding is reduced in the first place.
4
2.
The ABI / insurance industry two-year agreement
i.
Following the floods of autumn 2000, and because insurers
recognised that the Government needed time to put new policy
plans in place, the insurance industry - via the ABI - created a twoyear agreement on flood cover. This industry initiative committed
ABI member companies to continue to insure their existing
domestic and small business policyholders, save in exceptional
circumstances. The two-year agreement runs from 1 January 2001
until 31 December 2002.
ii.
The agreement has worked well. There have only been a handful of
cases where policyholders have experienced difficulties in renewing
cover with ABI members. The insurance industry used this period to
work in partnership with the Government on plans for improving the
UK’s system of flood risk management.
iii.
The agreement did not cover issues such as the level of premium or
excess in a policy. These are rightly matters for the commercial
decisions of individual companies, and must relate to the level of
risk that insurers are being asked to cover. In any case, competition
law precludes any market agreement of this sort.
iv.
As the incidence and cost of flooding have both increased (a typical
flood claim is between £15,000 and £30,000) premiums have
naturally risen in some areas to reflect this. It is worth noting that
household insurance remains an extremely competitive and costeffective market for consumers.
v.
The average cost of household insurance premiums across the UK
has barely changed (and has fallen significantly in real terms) since
1994.
July 1994
£
142
110
Buildings
Contents
Source: AA Premium Index
5
July 2002
£
139
112
AA Premium Index
105
100
95
Building
Contents
90
85
Ju
l-9
Ja 4
n95
Ju
l-9
Ja 5
n96
Ju
l-9
Ja 6
n97
Ju
l-9
Ja 7
n98
Ju
l-9
Ja 8
n99
Ju
l-9
Ja 9
n00
Ju
l-0
Ja 0
n01
Ju
l-0
Ja 1
n02
80
vi.
The agreement was always intended to be a temporary
arrangement and has now run its natural course. It clearly does not
take into account the progress made by Government in its flood
management policies over the last eighteen months, and was not
designed to provide a long-term settlement. Since the agreement
covered policyholders and not specific properties it risked distorting
the property market. The ABI has therefore decided on a new
approach, responding to customer needs and reflecting progress in
flood risk management. It will apply from 1st January 2003 onward.
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3.
The ABI’s objectives
Two years ago, the industry identified three priorities for Government
action:
a)
greater investment in flood defences;
b)
radical curtailment of development in flood risk areas;
c)
faster and more consistent decisions on flood defences.
a)
Greater investment in flood defences
The Government’s own research in 2001 showed that the budgeted
spending on flood defences was significantly below the levels
necessary to meet DEFRA’s own standards of flood defence (the
Indicative Standards of Service for flood defence).
The ABI argued as a result that Government funding needed to be
increased by at least £145m a year. This would enable existing
defences to be strengthened and maintained, and also fund a
programme of new defences, with some provision for climate
change.
In July 2002 the Government announced its new public spending
plans. These included a significant increase in spending on flood
defences.
£ million
2002 - 03
2003 – 04
2004 - 05
2005 - 06
DEFRA
114
122
137
162
Local authorities
280
292
332
382
-
-
-
20
394
414
469
564
New funding streams
Total
It is clear from this announcement that total spending on flood
defences should increase significantly over the next three years –
by £150m a year by 2005 – 06. Much of this spending will be
implemented via local authorities, which, of course, have discretion
over its use. And some is dependent on the introduction of a new
tax.
Everyone with an interest in improving flood risk management will
want to see these investment promises delivered. It will therefore be
important for the insurance industry and others to continue to work
with Government to ensure that this policy commitment to additional
funding is translated into actual spending on the ground.
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b)
Radical curtailment of development in flood risk areas
Around one in ten homes in England and Wales are currently
located in areas of high flooding risk. But the pressures for
increased development in the flood plain, including brownfield sites,
all point towards an increase in this proportion in future, particularly
in London and the South East. Nearly a third of all planning
applications received in 2000/01 were for sites located in flood
plains.
The Government issued revised planning guidance to local
authorities for developments in flood risk areas in July 2001
(PPG25). This guidance requires flood risk to be taken into account.
The ABI welcomed the initiative and issued parallel advice on
insurers’ concerns to all planning authorities. It is essential that the
planning guidance is now implemented in full.
Progress on planning decisions in flood risk areas is monitored by
the Environment Agency, and there is some evidence that the new
guidance is already having a positive effect. Insurers will continue to
press for flood risks to be taken fully into account in planning
decisions.
c)
Faster and more consistent decisions on flood defences.
The organisation of flood and coastal defence decision-making and
funding is notoriously complex and fragmented. It often bears little
relationship to river catchment areas. The result is an inefficient
system that concentrates on short-term priorities and leads to
erratic and inconsistent outcomes. For instance, an Environment
Agency survey in 2000 revealed that 84% of flood defences in the
north-west of England were good or very good. By contrast, only
15% of flood defences in north-east were good or very good.
In February 2002, DEFRA and the National Assembly for Wales
issued a joint funding review consultation document which set out
ideas on streamlining and simplifying the processes and institutional
arrangements currently in place. The ABI’s response welcomed
many of the proposals but stressed the need for action now.
The Government has promised that it will come forward with clear
proposals to simplify and streamline the institutional arrangements
for decision-making on flood defences. Announcements are
expected this autumn. Insurers will look closely at these to ensure
that they deliver greater efficiency and that the additional funding
can therefore be used to best effect.
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The ABI’s new approach
4.
i.
Following an analysis of the Government’s recent announcements,
the ABI has agreed with its members a new Statement of Principles
governing the provision of flood insurance for Britain’s households
and small businesses.
ii.
The insurance industry is responding positively to the Government’s
plans. The partnership approach that has brought this recent
progress needs to be continued. The ABI will continue to play a key
role alongside other stakeholders in securing an effective system of
flood management and protection.
iii.
The new arrangement has five aims:
1.
full access to a competitive market for insurance for the vast
majority of homeowners and businesses;
2.
improved security for those who live and work in high-risk
areas;
3.
new provision for those who wish to sell their homes or
businesses;
4.
better use of new solutions to make properties insurable, even
in high-risk areas where improvements to flood defences are
not planned;
5.
a clear incentive for Government and local authorities to
continue to invest in flood defences.
iv.
The Statement of Principles is based on the Government’s own
target standards of flood defence. All ABI members (accounting for
85% of the household insurance market) will follow this statement.
v.
Premiums and excesses continue to be matters for the commercial
and competitive judgement of individual companies. Insurers will
base their judgements on their assessments of risk and likely
damage levels, using information that is publicly available from the
Environment Agency and others.
vi.
In order for this approach to work in practice, the Government will
need to provide early and accurate information on both risk levels
and improvement plans. Where there is uncertainty, insurers will
need to make prudent assumptions. There will need to be a
continuing close partnership between Government, insurers and
others to ensure an effective flood risk management process.
vii.
With this partnership in place, the new arrangement will enable the
industry to fulfil its ambition, shared with the Government, that flood
insurance should continue to be available to the vast majority of
customers. It will encourage the development and use of innovative
solutions to reduce the level of risk and cost of damage in difficult
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areas. It will also help to ensure that the momentum behind current
efforts to improve flood protection is maintained.
viii.
The agreement will be subject to a routine annual review by the ABI
and the Government to assess progress.
Association of British Insurers
25 September 2002
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