UK Floods: Don’t Say We Weren’t Warned (Part 2)

In my last post, I looked at the the recent history of climate change policy with respect to flood risk in the U.K.; in particular, a series of benchmark reports that starkly set out the flood risk choices the government and British people would have to take.

The realisation that climate change had transformed the flood risk game, together with the fallout from the 2007 floods as documented in The Pitt Review, led the Environment Agency to establish a long-term strategy (2010 to 2035), which was set out in a 2009 report entitled “Investing for the Future: Flood and Coastal Risk Management“.

The report identified 5.2 million households at risk of fluvial flooding (river and coastal), pluvial flooding (surface water and ground water) and both fluvial and pluvial.

And of the 2.4 million fluvial category, a more detailed breakdown in terms of expected frequency of flood was given.

Moreover, here are the critical regions for such fluvial flooding:

The media still reports the 5.2 million ‘at risk’ number of properties, despite climate science having moved on since 2009. Indeed, the above figures are all from the Environment Agency’s “Flooding in England: A National Assessment of Flood Risk” which came out in 2009 but is based on data for 2008. In my previous series of posts on flood risk, I pointed out that the current risk categories do not adequately take into account climate change or non-fluvial flooding (i.e., non-river and coastal flooding). Accordingly, all these numbers now look to be significant underestimates.

A few leaks have emerged with respect to the 2013 National Assessment (for example, in The Guardian here), but not enough to get a good impression of how the Environment Agency has moved the numbers around.

More controversially, the 2009 “Investing for the Future” report also gives us some cost-benefit estimates out to 2035. We start with 1.2 million houses at significant or moderate risk and then see how many still fall into these categories 25 years later. The base is £800 million per year divided between £570 million in tangible investment (building new flood defences and maintaining existing ones) and £230 million in intangible investment (mapping, analysis, warning systems and so on). Note that this was a forecast expenditure for 2010/11, since the report was written in 2009.

From this future base period, five different expenditure scenarios were plotted, ranging from conservative to aggressive.

Under the most conservative investment scenario, number 1, expenditures would flat line at £800 million per annum. Due to inflation, however, this would mean a reduction in spending in real terms, with the result that the U.K.’s flood defences would not keep up with rising climate change-related flood risk. As a result, an additional 330,000 homes would be added into the ‘significant’ and ‘moderate’ risk categories by the year 2035. By contrast, under the more free-spending scenarios, properties ‘at risk’ would fall.

The preferred scenario was Scenario 4, which would give a benefit-to-cost ratio of seven. In the words of the report:

It provides the greatest overall benefit to society, because it generates the greatest net return on investment. However, with this scenario, spending needs to increase from the £570 million asset maintenance and construction budget in 2010-2011 to around £1,040 million by 2035, plus inflation. This equates to an increase in investment in asset construction and maintenance of around £20 million plus inflation each and every year.

So what actually happened? Well, for a start, the Lehman shock. Then, the global economy fell into its worst recession since the Great Depression. Subsequently, David Cameron replaced Gordon Brown in May 2010, and the new Chancellor of the Exchequer, George Osborne, pledged the party to a policy of austerity. And the flood defence agenda was not immune from the cuts.

The House of Commons Library has all the up-to-date annual expenditure numbers in a research briefing called Flood Defence Spending in England. This shows that spending fell in real terms under the coalition government:

Accordingly, the expenditure path since the 2009 report has been lower than Scenario 1. In other words, a fall in spending in both real and nominal terms was witnessed, against a recommended incremental increase in real terms of £20 million per year.

Would a different expenditure path have made much difference to the flood-related losses currently being experienced? Probably not. The kind of precipitation seen over 2013/14 would have required vast expenditures to defend against. But the path taken has certainly increased future risk: each yearly incremental shortfall leads to a growing overall flood defence deficit.

The key question, then, is how the current flood defence expenditure path and flood trend will translate into future losses. The political battering the coalition governing is currently taking has already led to something of a U-turn, with a number of pledges being made to increase flood-defence spending. These include:

However, we are yet to see how such spending fits in to the original flood defence investment recommendations made by the Environment Agency.

Ironically, as part of Britain were drowning, the new public-private flood insurance agreement was winding its way through parliament as part of the Water Bill. A summary can be found here and a useful Q&A is available at the Association of British Insurer’s site here.

As with the previous Statement of Principles, the new mechanism relies on a cross subsidy from low risk properties to high risk properties, although it is all organised though a new legal entity: Flood Re. In other words, those properties not at risk of flood pay slightly more in insurance premiums than their actual risk profile would warrant, and these premiums build up to become the capital of Flood Re.

Nonetheless, every household subject to any kind of flood risk must be aware of the many caveats to the scheme. Principally:

• Flood Re’s risk numbers are based on the Environment Agency’s “Flooding in England: A National Assessment of Flood Risk” which came out in 2009, but is based on data for 2008. Accordingly, all the property at risk numbers are out of date and do not adequately take account of climate change.
• This is a transitional arrangement slated to run for 20 to 25 years. At the end of this period, market-based pricing is supposed to rule. Given the climate change trend, this means that ‘at risk’ households will be subject to a) major insurance premium increases in future or b) no availability of flood insurance at all. Moreover, the property market will not wait until the end of the scheme, but will mark valuation down well in advance; remember, no insurance means no access to a mortgage.
• High-end houses in Council Tax Bank H are not included. So all those Thames-side mansions currently under water are on their own.
• Properties built after 2009 do not fall under the scheme.
• Businesses and buy-to-let properties are not covered.
• ‘Uninsurable’ properties will not be included. This is suitably vague so as to provide a get-out clause for the industry. It will be interesting to see if all those Thames-side properties flooded in both the 2012/13 and 2013/14 winters will be classed as ‘uninsurable’.
• The government has provided a comfort letter, but not subjected itself to a legal requirement to support the scheme should it fall into financial distress. It promises to back stop the scheme if a one-in-200-year event takes place, giving rise to a loss of £2.5 billion or more (note 2007 would fall into this category with a loss of £3 billion). With climate change progressing, however, what is a one-in-200-year event now will not be a-one-in-200 event in future.

To support my assertion that Flood Re is currently begin designed around dodgy ‘at risk’ numbers I refer you to a paper by Swenja Surminski and colleagues from the Grantham Research Institute on Climate Change and the Environment critiquing Flood Re, which can be found here. Two bullet points from the report summary stand out:

Note that Dr Surminski was the Association of British Insurer’s Climate Change Advisor from 2007 to 201o.

Against this background, if we get a couple of 2007 type floods in quick succession in the relatively near future (i.e., before Flood Re can build up capital), then the government would likely be expected to act on its comfort letter and recapitalize Flood Re.

At some point, however, the government interest in excluding ‘uninsurable properties’ will fall in line with that of the insurance industry—otherwise the government could get into the untenable position of bailing out property owners whose houses are getting flooded a number of times per decade. Or, alternatively, the government may have to investment massive amounts of money in flood defence to protect these properties. But for many properties, the flood defence expense would dwarf the value of the properties themselves, making abandonment the most sensible policy choice.

The bottom line for all this is that Flood Re will likely provide only a temporary respite for most holders of ‘at risk’ properties. As climate change progresses, more and more ‘at risk’ properties will be shunted out of Flood Re and into the ‘uninsurable’ category. And for many properties, flood defence may just prove financially unfeasible. Don’t say you weren’t warned.