Managing flood risk: Why flood insurance needs to send the right signals

Anticipatory action and preparedness is much more economic than providing disaster aid. However, there have recently been many missed opportunities to put sensible long-term risk management in response to climate change at the heart of policy making. The Government’s proposed flood insurance scheme, known as Flood Re, is a key pillar in the strategy of sharing risks and distributing the costs of compensation and recovery, but several changes are needed to the current proposals for it to be a success.

After weeks of wet and windy weather we don’t need any more reminders that flooding is a key challenge for this country, disrupting communities, businesses, and families, causing stress, anxiety and in some cases financial ruin. What is less clear is if and how we will draw the right conclusions and focus on future preparedness.

In 2005 Defra outlined the ‘Making Space for Water’ strategy for dealing with rising flood risk. Nine years later we witness what happens if there is not enough ‘space’ for water. With the amount of rainfall and the severe storms that we are currently witnessing some flooding seems unavoidable. This highlights a huge distributional challenge: where to protect, who to pay, and how to compensate those suffering losses. Uncomfortable, but important decisions – without addressing them it will be hard to make any progress in our quest to manage flood risk in a fair and efficient way.

Right now the political blame game is in full swing, with the Environment Agency once again in the firing line. Nothing new here; just remember the 2007 floods, when the then Environment Agency Chair Baroness Young said that it felt as if every raindrop had the word ‘Environment Agency’ written on it. And in the wake of rising flood water the Government is now asserting that money will be “no object” in helping households and businesses cope with extreme – another typical pattern when disaster strikes. It is well known that anticipatory action and preparedness is much more economic than providing disaster aid. But selling risk reduction and adaptation to politicians and voters has always been tricky. The opportunity costs are high and there is a chance that you may get away with doing nothing if a disaster doesn’t happen before the next election.

Too often there’s a disconnect between well-informed, long-term strategies and short-term policy decisions. Take the example of the National Adaptation Programme, launched by Defra last summer. It outlines the expected risks posed to England by climate change and highlights the action needed in response, with flood risk management identified as the key priority. Only a few days before publishing the plan, Defra had introduced a new flood insurance proposal meant to secure insurance for the next 20 years and beyond, but, astonishingly, the proposal was without any reference to changing flood risks as a result of climate change and did not include any clear incentives to do more on flood risk management, not for home owners or insurers, nor for government. This is a missed opportunity to put sensible long-term risk management in response to climate change at the heart of policy making.

Who pays when the water recedes?

The Government’s proposed flood insurance scheme, known as Flood Re, is a key pillar in the strategy of sharing risks and distributing the costs of compensation and recovery. Flood Re is a convenient way of avoiding liabilities for government. Getting insurance customers to pay for flood recovery is more attractive than going down the tax payer route. But to be a success several changes are needed to the current proposals. While rising flood losses and increasing costs of insurance are the two main reasons for reforming the existing insurance arrangements, one important aspect has been widely neglected: how the existing arrangement and new flood insurance proposal reflect on the need to manage rising flood risks. To keep premiums affordable flood insurance for high risk properties will be funded through a levy paid by all insurance customers. What needs to be clear is that this is not a bottomless pit – Flood Re needs to be actively involved in ensuring that flood risk is managed properly. Rebuilding and restoring is obviously important, but it needs to be done in a forward looking way. Only then will flood insurance be a sensible tool in our efforts to cope with rising flood risk. Our research has identified ways to do this:

To begin with flood risk reduction should be established as an official aim of Flood Re. The scheme should send clear signals to policy makers nationally and locally in support of flood risk management policies, as well as create greater risk awareness and focus on resilient repairs. The new pool provides an opportunity to operationalise this and, as an example, it would seem to be a ‘no-brainer’ that the owners of homes that come under the scheme should at least be informed that they are in a flood risk area and advised of what precautious they should take to protect their property from damage.

The current extreme weather and damage to homes could and should create a momentum for reforming the proposals. Flood risk management and adaptation need a strong lobby – not just during and after, but most importantly before flooding occurs. The insurance industry should take the initiative by underlining their capabilities and their commitment to provide flood insurance, but also acknowledging the flaws of Flood Re and seeking to correct them. Current anger and frustration about those in charge of managing floods will soon shift to those responsible for recovery. Once the emergency is over the dreadful and long process of clearing up starts. It will just be a matter of time until the focus of an angry public will shift from the Government and Environment Agency and onto the insurers, just as it did in previous floods. Taking the initiative now and ensuring that flood risk management remains a priority for decision makers seems a sensible strategy for the industry.

And there is another selling point. For a coalition Government that wants to see everything as a business opportunity, there is a chance here. As Owen Paterson, Defra’s Secretary of State, said when launching the UK’s National Adaptation Programme last summer:

As the world’s climate changes, Britain’s expertise in areas such as weather forecasting, flood modelling, infrastructure and insurance are already coming to the fore to prepare us for the kinds of events we might see more often. Indeed, the UK is already one of the global leaders in this industry of the future and this market is expected to grow by 5% or more year on year, supporting skilled jobs and the weather-resilience that saves money in the long term.

While his comments about the world class flood services may sound slightly cynical, particularly to residents of the Somerset Levels who have been underwater for several weeks, there is an important message here: resilience and flood risk management make economic sense, the business case for action is clear.

Could this be the hook for politicians – flood resilience as a growth strategy, with economic benefits way beyond averted disasters? This appears a promising approach, as growth and opportunities get politicians and investors more excited than risk scenarios and loss projections. At the very least we need to avoid climate change adaptation and risk transfer being victims of short-sighted trade-offs. Flood Re is an important piece in the puzzle, but without incorporating the need to reduce flood risk it may give people a false sense of security. Getting this right – and selling this to policy makers and those at risk is the core of the adaptation and flood risk management challenge.
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This article is written by Swenja Surminki, Senior Research Fellow and was originally produced on the LSE politics and policy blog