After Superstorm Sandy reopened a fiery debate over the wisdom of federal flood insurance in the U.S., flooding that inundated hundreds of homes in England and Wales this week has the United Kingdom searching for its own solution for personal flood cover.
Currently, flood insurance in the UK is privatized — but that's based on an agreement under which the government promises to take aggressive measures to limit the impact of flooding. But insurers have criticized the measures as inadequate — and local politicians of affected areas have joined in.
The major thrust of the complaints are that other European countries, such as Denmark, have done a much better job mitigating flood. With the British measures seen lacking, some have even installed their own flood mitigation materials, but that doesn't lead to lower insurance premiums.
Further complicating the issue is that the agreement between the government and private insurers is set to expire next June. Now, the industry wants the government to agree to fund some of the cost of insurance while flood mitigation initiatives are developed and mature.
The increase in property values and the propensity to build in flood plains have increased risks for insurers. Higher flood-related losses incurred from the numerous flooding incidences in June, July and last weekend will contribute to a deterioration of underwriting margins for UK non-life insurers for their full-year 2012 results.
In the SoP, the UK insurers agreed to provide flood insurance to standard households and small businesses in areas of significant flood risk in return for the government taking action to reduce this risk to below a 1- in-75 chance of flooding within five years from July 2008. Frustrated by the slow pace of these improvements, the Association of British Insurers (ABI) has made it clear that agreement would not be renewed.
What the ABI wants is a new agreement that continues the government's commitment to flood mitigation while also providing subsidies to high-risk insureds in the meantime. The government shot down that idea earlier this week, angering insurers. Fitch Ratings, however, says some sort of government-backed or -facilitated high-risk pool is likely the only solution to affordable flood insurance for UK citizens in the line of water.
More catastrophic weather events in areas that traditionally have not been affected by them is a major concern of insurers. Some, like Swiss Re and Munich Re, attribute the increased risk to climate change. Others, including Main Street America Group, are only willing to say that the events are expected to spike in the near future while being agnostic as to the causes. Still, it only takes one devastating event to cripple a region and its insurers — as was demonstrated by Hurricane Andrew. Governments, insurers, and policyholders can't afford to waste much time coming up with solutions to cover financial losses. Nor can homeowners covert to floating houses overnight.