Strengthening the UK’s flood insurance partnership in the face of rising risks: what role for property developers?

Houses by the river Aire in Leeds during a flood in December 2015

Since April the UK has a new flood insurance scheme: Flood Re has been heralded by government and industry as a roadmap to future affordability and availability of flood insurance. But research suggests that the scheme will do little to address the increased risk posed by floods to UK households. The new insurance pool has been designed to make flood insurance more affordable regardless of the flood risk you are facing. It does little to actually help solve the problem of flooding. Flood Re does not incentivise the reduction of flood risks or encourage the uptake of flood resilience and protection measures for properties. This leaves the system weak in the face of climate change, urbanization and failed land-use planning.

With these questions in mind, our latest piece of research asked: how can Flood Re be strengthened?

We looked at the many different people and organisations who through their actions have influence over flood risk levels, including local authorities and property developers. Having mapped out the many different actors involved at different stages, and having modelled the complex relationship between them, we argue that the current approach to flood insurance from government and industry is too narrow. We believe it misses out some key stakeholders who could play a role in reducing flood risk.

In particular, our Agent-Based-Modelling technique provides new insight into the role of local governments and property developers as key actors who make decisions about future flood risk levels.

What role for property developers?

Flood Re explicitly excludes new build properties. To avoid encouraging development in high flood risk areas, only properties built before 2009 are eligible for the scheme. But will this be enough to stop development in areas of high flood risk?

The exclusion of new builds from Flood Re is, without doubt, an important measure. Property developers and home buyers need to avoid building and buying in risky areas.  But, since neither property developers not planners bear the burden of flood risk, we suspect that more needs to be done.

Around 12% of all new residential development in England between 2001 and 2014 took place on floodplains, according to a recent report by the Committee on Climate Change. Around 25% of that floodplain development has been in areas at medium or high levels of flood risk. A report from the Environmental Audit Committee also raises concerns about the implementation of the terms of planning permission and the fact there was no check at the end of the planning process to see if properties were being built in sensible ways.

Property developers are involved right at the start of the development process and can therefore play a key role in reducing and managing surface water flood risks for new developments. Developing in the correct way and in the correct location will minimise current and future risks to both the development itself and the area surrounding the development. The issue is problematic as property developers have only a limited interest in the insurability of the new homes, not beyond the point of sale.

Our findings

In our research, we tested different ways to reduce the number of properties at risk from flooding. We also tested what effect this would have on flood insurance premiums.

  • Option 1: Developer contributes 10% to government Flood Defence Investment
    • Result: limited impact on flood risk levels and flood insurance premiums             
  • Option 2: Developer pays flood risk insurance for first 5 years of new property
    • Result: limited impact on flood risk levels and flood insurance premiums
  • Option 3: Developer must build all new properties with Sustainable Drainage Systems (SUDS) in place
    • Result: reduces flood risk levels and insurance premiums
  • Option 4: Limited number of houses developer can build
    • Result: limited impact on flood risk levels and insurance premiums
  • Option 5: A combination all above options
    • Result: strongest reduction in flood risk levels and insurance premiums

Evidence of trade-offs with developing in flood risk areas

Of the individual solutions tested, only SUDS significantly reduced flood risk and insurance premiums.

Yet, simply asking developers to include SUDS is not necessarily the answer. We find that strategies encouraging the use of SUDS by developers also lead to a larger number of developments in areas of flood risk. So there is a trade-off – SUDS reduce flood risk for an individual property, but they can lead to actions that would actually increase flood risk. We must look at the bigger picture.

There is evidence of other trade-offs too. It is not clear who will be responsible for maintaining flood defences in future. In fact, this risk is already beginning to materialise – the recent Environmental Audit Committee report has found that the condition of some flood defences is already in decline and that many communities are not sufficiently protected from the risk of flooding.

Developing on floodplains will clearly have strong implications for future flood insurance since new builds are not eligible for the Flood Re scheme. If new property development in high risk areas continues to be built, as current trends suggest, we are concerned that political pressure will cause Flood Re to be extended to cover new build properties. This would be bad news for the insurance partnership.  It would remove the only risk reduction incentive that Flood Re has.

Instead, Flood Re needs to find new ways to engage with property developers, local authorities and individual insurance companies in addressing flood risk. Our research highlights a few options.

However, the role of insurers can go beyond providing risk transfer. The insurance industry is the world’s largest institutional investor and could play a role in infrastructure and property investment decisions. As it stands, investment decisions by insurers do not usually consider the climate risk knowledge gained on the underwriting side. Far too often property and infrastructure investment decisions go ahead without any reflection on potential climate risks. Closer attention paid to flood resilience at the time investment decisions are made could result in improved flood insurance provision.