The floods in the UK in February were a catastrophe for everyone affected. It was portrayed dramatically by the 24/7 news coverage which highlighted the suffering, the inadequacies of flood defences and initially the lack of response from emergency services and government. In the later stages, insurers had to take a share of the blame for delays even though the processes of dealing with the water damage, drying out, assessment of the loss and repairs take months if they are to be done properly. Arguments rage as to the causes and solutions – to dredge or not to dredge, the cost-benefit analysis of implementing flood defence work, the overall spend on flood prevention, whether to protect land or property and, of course, insurers’ willingness to insure property that is repeatedly flooded. Quite rightly, the only sensible approach is to hold a properly considered post-mortem after the initial emergency is over. We are told that January and February were the wettest months on record and we experienced once-in-250-year weather. The media coverage gave the impression of a tragedy of huge proportions yet the figures do not suggest this. Just over 6,000 houses were flooded, which is about 10% of the number in 2007. If the figures are correct the insurance loss is about ?300m and allowing for commercial losses and business interruption the industry loss could be about ?500m – well below the estimated ?2-3bn of the 2007 floods. This figure seemed to be substantiated by Aviva declaring flood losses of about ?60m. The numbers may turn out to be low but it does look as though flood prevention schemes and the action of authorities have had a major favourable impact. Towns that are habitually flooded along the Severn seem to have escaped the worst because of recent work and flooding along the Thames was not as disastrous as it could have been. The loss, while large, has not been significant enough to impact the share prices of insurers and it seems that providing the rest of 2014 produces no other major weather event, it is containable. The Association of British Insurance companies receive just under ?7bn of household insurance premium each year and the loss is under 5% of this. Over the last 10 years about ?60bn has been paid in household premiums and ?35bn paid out in claims. An underwriting profit was made in seven of the years. Even taking into account the major floods of 2007 and storms of 2010, an underwriting profit of about ?750m was made over the period. The profit made in non-flood years makes this class attractive for insurers. The glaring issue is insurers’ costs. This accounts for a massive 40% of premiums paid – ?2.8bn in 2012 and ?24bn over the 10-year period, the lion’s share being commission. A great deal of the figure comes from high levels of commission paid to banks and building societies and some large brokers. This needs to be looked at. From 2015, the Statement of Principles will be superseded by Flood Re, spreading the burden of flood insurance more equitably around the market. It will be funded by a levy/tax on all policyholders and an affordable premium on properties in high-risk flood areas. This will range from ?220 for a band A property to over ?500 for a band G one, now possibly with a higher figure for a band H home. Business properties, buy to let and properties built after 2009 are excluded. 1 It is hoped that the availability of affordable flood insurance will not ease the pressure on government to spend adequately on flood prevention. This is crucial. There is also no mention of incentivising homeowners to carry out their own flood prevention work or penalising those who do not. 2 Commission may be an issue. Presumably premiums paid to Flood Re are net and have to be grossed up. It will be interesting how insurers and those receiving high commission deal with this. Will policyholders have to pay much more according to the intermediary they choose? Or will insurers have to produce a system where no commission is payable. This would be an administrative nightmare. 3 There are a number of exclusions. I agree that commercial premises and buy to let properties should be excluded. It is not equitable that businesses are subsidised by those located in non-flood risk areas. However, the anomalies need to be considered. Tenants should be able to obtain contents cover. Houses with partial business use should be considered. No doubt these issues will be sensibly resolved. 4 Full consideration needs to be given to the dividing line between what is a flood and what is a storm. This can already be difficult with damage caused by surface water, overflowing drains, flash floods and so forth. Presumably the claims bible being produced will cover this. 5 When the flood risk for high-risk properties is taken over by Flood Re, the remaining risks are comparatively low and predictable. Household insurance will become an extremely profitable class and competition for business will intensify especially from direct writers where commission is not payable. This will be good news for policyholders but bad news for those that earn very high commissions. Flood Re will take losses up to ?250m and reinsure up to a one-in-200-year loss estimated to be ?2.4bn. We had our one-in-250-year loss in February, so it should prove to be highly profitable for reinsurers and Flood Re. However, nature will no doubt continue to be highly unpredictable, so I anticipate there will be many more twists in this tale.”Tags: Flood Re floods Flooding Send to a friend Mobile Print Share Reprints Subscribe RSS Email alerts Recent comments Please enable JavaScript to view the comments powered by Disqus. 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