New flood insurance scheme could be unsustainable because it overlooks climate change
A proposed new scheme for flood insurance in the UK may not be sustainable because the impacts of climate change have not been taken into account, according to a policy paper published today by the Centre for Climate Change Economics and Policy and the Grantham Research Institute on Climate Change and the Environment at the London School of Economics and Political Science.
Responding to a consultation by the Department for Environment, Food and Rural Affairs on ‘Securing the future availability and affordability of home insurance in areas of flood risk’, which was launched in June 2013, Dr Swenja Surminski and co-authors warn that “flood risk is expected to increase due to climate change and continued development of floodplains for residential and commercial property, which increases the exposure of homes and businesses”.
The new scheme, Flood Re, has been put forward by the Government and the Association of British Insurers (ABI) as an alternative way of offering flood insurance from 2015 to an estimated 500,000 UK homeowners who live in areas of high flood risk. About 6 million residential and non-residential properties in the UK are thought to be exposed to some level of risk of coastal, river or surface water flooding.
In order to cover the claims for losses caused by damage to homes at high risk of flooding, the premiums for all residential property insurance policies, including those for homeowners at moderate, low or no risk of flooding, will include a levy of £10.50. This charge will explicitly provide Flood Re with an estimated £180 million annually, which the ABI considers is equivalent to the total implicit subsidy from existing policy-holders to cover claims from the 500,000 homes at most risk of flooding. Policies for those homeowners not at high risk of flooding, and therefore not included in Flood Re, will still be provided through insurance companies operating in ‘the free market’.
The Flood Re scheme, outlined in a Memorandum of Understanding between the Government and the ABI, is intended to replace the current ‘gentlemen’s agreement’, known at the Statement of Principles on the Provision of Flood Insurance, between insurance companies and the Government through which cover is offered to most homeowners whose properties are not located in areas of significant flood risk (defined as greater than or equal to 1.3 per cent or 1-in-75 chance of being flooded during the year). The Memorandum indicates that Flood Re would be phased out after 20 to 25 years.
But the paper by Dr Surminski and colleagues points out that the ‘Impact Assessment’ for the scheme which was published by the Government does not mention the effect of climate change. The UK Climate Change Risk Assessment, published by the Government in January 2012, indicated that the number of residential properties in England and Wales exposed to a significant risk of coastal or river flooding could increase from 370,000 in 2008 to between 450,000 and 800,000 by the 2020s (assuming no new buildings), and between 500,000 and 1.5 million by the 2050s.
The paper states: “The design of the Flood Re scheme, which is expected to last until at least 2035, has not taken into account adequately, if at all, how flood risk is being affected by climate change. For this reason, it is likely to be put under increasing pressure and may prove to be unsustainable because the number of properties in future that will be at moderate and high probability of flooding has been significantly underestimated.”
It also points out that the proposals for the new scheme make no reference to the role flood insurance should play in the National Adaptation Programme. The paper states: “The Flood Re scheme also does not offer integrated mechanisms for flood insurance to play its part in climate change adaptation. This means that it is unlikely to provide a long-term solution to the growing problem of uninsurable properties.”
The paper adds: “The design and operation of an insurance scheme should have good risk management behaviour in mind, not just by the insured, but also by the Government and local communities. Private flood insurance will only have a future if it is embedded in a comprehensive risk management programme that responds to changes in risk over time, which would also have clear advantages beyond the issue of insurance.”
“Not enough consideration has been given to how the proposed Flood Re system will complement Government action on flood risk management. The existing scheme, governed by the Statement of Principles on the Provision of Flood Insurance, with all its limitations, did provide links between flood insurance and spending on flood defences, improvements in planning regulations, and access to flood risk information. It is not clear whether the new Memorandum of Understanding between the Government and insurance industry will strengthen these links.”
Notes for Editors
- The Centre for Climate Change Economics and Policy (https://www.cccep.ac.uk/) is hosted by the University of Leeds and the London School of Economics and Political Science, and funded by the UK Economic and Social Research Council (https://www.esrc.ac.uk/) and Munich Re (https://www.munichre.com/).
- The Grantham Research Institute on Climate Change and the Environment (https://www.lse.ac.uk/grantham) was launched at the London School of Economics and Political Science in October 2008. It is funded by The Grantham Foundation for the Protection of the Environment (https://www.granthamfoundation.org/) and the Global Green Growth Institute (https://www.gggi.org).