Tag Archives: Environment Agency

U.K. Floods: If Only They Had Dredged?

Over the last couple of months, we have seen a pack of welly-booted U.K. journalists from News at 10, Newsnight and Channel 4 News interviewing a series of rather depressed and bedraggled flood-victims of Somerset and the Thames Valley. A good proportion of these have been parroting The Daily Mail‘s claim that it is all the Environment Agency’s fault through a lack of dredging.

Is it true?

Let’s look at an Environment Agency presentation called “River Dredging and Flood Defence: To Dredge or Not to Dredge“. To start with, we have a river channel and an adjacent floodplain.

EA Floodplain jpeg

When we have extreme precipitation, the channel overflows into the floodplain.

EA What Happens jpeg

The critical question for the Environment Agency relates to the relationship between the flow of water that can be accommodated in the channel to the flow of water that can be contained within the adjacent floodplain during an extreme weather event.

EA Change to River jpeg

And in the case of the January floods, we do have data to suggest that river flow has been setting records and so could not have been accommodated in most river channels unless extraordinary aggressive and expensive dredging had taken place. The chart below is from the Centre for Ecology and Hydrology’s January 2014 Hydrological Summary (click for larger image):

River Flow jpeg

The black circles indicate exceptionally high flow, and the arrows a new record. So the Thames, for example, recorded a flow 263% above the long-term average in January (you may need to follow the link to the monthly report to see this clearly).

The Environment Agency then goes on to point out that if you want to keep water off the floodplain then you would need to both deepen and widen river channels and repeat dredging at regular intervals to prevent silting. This all costs money, but it can be done.

In my former home of Japan, flood defence has to account for deluges following typhoons. Accordingly, the system must cope with irregular floods that are many multiples of the long-term average river flow. As a result, the country is covered in massive concreted river channels through which just a trickle of water flows for many years—until a big typhoon hits. It is not pretty flood defence. You could do this to the Thames, but it certainly would no longer look like the Thames of Jerome K. Jerome or Kenneth Grahame by the time such work had finished.

Moreover, you can’t modify the river channel at one point and not at others. If you did, water flow would hit pinch points, which are frequently structures like bridges.

Pinch Points jpeg

The agency also directly contradicts an assertion made by Christopher Booker of the Daily Telegraph. Booker claimed that if only dredgers were allowed to dump silt on the river banks costs could be kept down. The dreaded EU is supposed to prevent such a common sense action for environmental reasons. As with all Booker’s writings, anything that doesn’t fit the story is, of course, left out; in particular, the common sense result of dumping silt on river banks is to raise the floodplain and reduce the volume of water that can be held therein.

Raising the Floodplain jpeg

Against this background, let’s return to The Daily Mail accusation; “non-dredging “was what did it”. Below is an example of the reportage. As an aside, almost all the U.K. climate skeptic web sites have been carrying these photos as well. The Daily Telegraph also ran with them in an article here. They specifically relate to the Somerset Levels.

Daily Mail Dredging jpeg

What I don’t like about these ‘before and after’ photos is that they are taken from a different angle. In the second photo, we can’t see the span of the river channel since the left bank blocks our view. However, there does appear to be some build-up of the river bank on the right bank as evidenced by the circular hole being partially obscured. Nonetheless, we can’t calculate the change in flow capacity from these ‘before and after’ pictures alone.

We also don’t know exactly when the original photo was taken: only in the ‘1960s’. We do know, however, that the Somerset Levels had a massive flood in 1960. You can see this in a County Gazette 50th anniversary article here, with a series of photos here. There were also, incidentally, major floods in the area in 1951, and these led to comprehensive flood defence works—which obviously weren’t sufficient to cope with the rainfall in 1960.

The Daily Telegraph story with the ‘before and after’ photos also includes this assertion from a local pro-dredging group Flooding on the Somerset Levels Action Group (FLAG).

A spokesman for the FLAG group has got hold of meticulous rainfall records for the area around the Parrett and Tone for the last 20 years.

They reveal between December 1993 and February 1994 around 20 inches of rain fell – five inches less than during the same time this year.

A spokesman for the group said: “So roughly the same rainfall but far more flooding now.

“What has changed? Dredging seems to be the biggest obvious difference between then and now.”

Based on FLAG’s figures, 20 inches fell in 1993/4 against 25 inches on this occasion. This is not really “roughly the same rainfall”; 2013/4 is 25% higher than 2013/14 on their numbers. Given we experience flooding when a river channel reaches capacity, this 25% by itself looks significant.

Moreover, we don’t have access to FLAG’s data, but we do have access to rainfall records via the Met Office for the nearby Yeovilton weather station. Yeovilton is approximately 18 miles away from Burrowbridge, which is in turn in the heart of the Parrett/Tone area and the site of the bridge photoed above. Yeovilton is also 5 miles north of Yeovil in the Environment Agency map below (although not marked) and firmly inside the Parrett Catchment Flood Management Plan (CFMP).

Parrett CFMP jpeg

In December 1993 rainfall was 117.9 mm at Yeovilton, 99.8mm in January 1994 and 81.1 mm in February 1994. That comes out at 28.9 cm or 11.4 inches, although I admit it is very difficult to tell if we are comparing apples and pears here. We don’t yet have Yeovilton data for the current flooding episode (is released with a lag), but when it comes out we will have a direct comparison of 1993/4 and 2013/4 rainfall.

Interestingly, while the Somerset Levels have been badly affected by the current floods, centres of population that are deemed at risk have mostly come through unscathed. A June 2013 report on the Parrett CFMP pinpointed the larger towns susceptible to flooding, none of which have been hit hard this time around:

One Percent Change of Flooding jpeg

So Environment Agency flood defence work to date can be seen as quite successful in terms of protecting built-up areas in the Parrett CFMP. It has been less successful in protecting isolated villages and rural areas, but to a large degree this was due to choice rather than neglect.

At this point, I will stress that the Environment Agency’s own work does show that dredging would have a substantial impact on reducing the number of days villages and agricultural land remain under water. The charts below have been going around all the usual climate skeptic blogs and are taken from an Environment Agency hydraulic modelling study that can be found here:

Drainage Model Parrett jpeg

The charts show a far quicker recovery from flooding events after theoretical dredging, although in the case of Curry Moor the peak flood level is very similar before and after the dredging.

So is that game, set and match to the pro-dredgers? Not quite. For a start, we should always keep in mind that the Somerset Levels are quite unique in terms of their hydrological challenges and don’t provide any real lessons for major rivers such as the Thames. But far more important is the fact that the same climate skeptic blogs who printed the above chart rarely print this one (source here):

Parrett and Tone Cost Benefit jpeg

The above charts show benefits and costs under different assumptions So the choice to dredge could have been made, but the benefit-to-cost ratio (BCR) would be somewhere around one to one.

Is such a project in line with government guidelines? In May 2011, a new approach to the funding of projects was unveiled by the Department for Environment, Food and Rural Affairs (DEFRA) with respect to flood and coastal erosion risks . You can find details here. The underlying methodology underpinning all government benefit-cost-ratio calculations can be found in the Green Book, the Treasury’s bible for expenditure decisions.

An evaluation of Defra’s flood defence project decision-making was undertaken by the hydrology specialist JBA Consulting in March 2012 (here); they looked at a series of case studies to see which ones would have received government grants. You can see these here (click for larger image):

JBA Consulting BCR jpeg

The media frequently reports a benefit-to-cost ratio of eight as the hurdle rate for flood projects to go ahead, but, as the table above shows, the methodology is more complex than that. Nonetheless, only three of the six projects that would have been eligible for flood defence grant in aid—the ones which had partnership funding scores above 100%. These three had benefit-to-cost ratios of 7.23, 8.14 and 4.68, respectively. The Parrett and Tone dredging scheme can’t get anywhere close to these numbers.

In short, David Cameron, who has just announced the recommencement of dredging on the Somerset Levels, has thrown Treasury benefit-to-cost ratio guidance out the window due to the political fallout from the floods. I doubt, however, that this ad hoc response will translate into the longer term promotion of flood defence projects with low BCR ratios. Why should flood defences be treated differently from cancer wards, kindergarden places, pedestrian crossings or pollution control? And given that the Treasury has a hard budget restraint, my belief is that they won’t be once the political hullabaloo has subsided.

Meanwhile, climate change has barely begun to change the risk equation. The Environment Agency has this to say about the Parrett catchment in a time of climate change:

Climate Change Parrett jpeg

The 500 mm sea level rise figure for 2100 is possible, but the scientific consensus in now for an upper level of possible sea level rise of one metre or more by century end. Nonetheless, even using the agency’s current, rather conservative assumptions, flood risk for  towns in the Parrett catchment jumps significantly:

Current and Future Flood jpeg

My own personal opinion is this: since climate change is radically altering flood risk, individuals should proactively protect themselves. Expecting the government to always bail oneself out through dredging, insurance or whatever is, in itself, a high risk strategy. There is a limit to what the government can do—or afford to do. And when the government reaches such a limit, you are on your own.

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.

Properties at Risk jpeg

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

Fluvial Flood Risk jpeg

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

Properties at Flood Risk by Area jpeg

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.

Flood and Coastal Risk Expenditure jpeg

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

Investment Scenarios jpeg

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.

Cost Benefit Flood Investment jpeg

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:

Flood Defence Spending jpeg

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:

Response to 2014 Winter Floods jpeg

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:

Grantham Flood Report jpeg

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.

UK Floods: Don’t Say We Weren’t Warned (Part 1)

The public’s reaction to the recent extensive flooding in the U.K. has been one of surprise and frustration. Surprise at the government’s lack of prior planning for flood and frustration at the speed and size of response.

Yet, frankly, there is nothing really to be surprised about. The 2013/14 floods are part of an emerging pattern, which includes the 2003, 2007 and 2012/13 deluges. Accordingly, decisions have not been made in a vacuum; risks have been assessed by the government based on recent flood events and conscious cost-benefit choices made—and there is a paper trail of documents to prove this.

Tackling flood risk is also a classic case of decision-making under uncertainty. Floods have always followed their own probabilistic logic, but climate change has made the range of outcomes far more uncertain. Risk is probability times effect, and climate changes is pushing up flood frequency and severity. This is what both policy-makers and private individuals face.

The realisation that the U.K. has a problem with respect to flood and climate change moved from academia into government over a decade ago. This post looks at the major reports that have shaped government thinking, while the next looks at how this has translated into the speed of flood-defense roll-out and the extent of insurance provision that will be available going forward.

A decade ago, two benchmark reports were published on flood risk: one a private sector report under the auspices of the Association of British Insurers (ABI) called “The Changing Climate for Insurers”, the other a government-sponsored report called “Future Flooding” from the state’s futurology think tank The Foresight Programme. Four years later, “The Pitt Review” was released in response to the catastrophic floods of 2007. And following a recommendation within the Pitt Review, in 2009 The Environment Agency published its long-term strategy document called “Investing for the Future: Flood and Coastal Risk Management”, which looked out to 2035.

All four reports took climate change as a given. All four reports set out the hard choices that have to be made as climate change loads the dice for flood risk.

Let’s start with the ABI’s “The Changing Climate for Insurers” the Executive Summary of which can be found here. The report contains a forward by the then Head of General Insurance of the Association of British Insurers (ABI), John Parker, who was unequivocal about the role of climate change:

Climate change is no longer a marginal issue. We live with its effects every day. And we should prepare ourselves for its full impacts in the years ahead. It is time to bring planning for climate change into the mainstream of business life.

The report suggested that the finger prints of climate change were already showing up in the data:

Extreme Months jpeg

And the author of the report, Dr Andrew Dlugolecki, went on to put the government on notice that things would have to change:

Climate change will increase the frequency and severity of extreme weather events, as well as longer-term trends in weather. The possibility of weather-related catastrophic losses will be much greater, raising issues for insurers of both insurability and capacity. Insurance can only provide a suitable risk transfer mechanism if risks are kept to a manageable level. The insurance industry has a role on behalf of its customers and shareholders, in highlighting the scale of the risks, and examining steps that are needed by all parties (including the Government) to manage risks and ensure that financial protection remains available for the majority of customers.

He also put private-sector customers on alert that things would change for them too. Specifically, owners of ‘at risk’ properties would need to be prepared for ‘at risk’ insurance pricing. Moreover, ‘at risk’ would be less based on what had gone before than on what is likely to come:

The increasing use of risk pricing could enable future claims to be met, provided risks are assessed accurately. Historic claims and climate data will not provide adequate models, so reliable alternatives need to be developed.

Meanwhile, the government had put its futurology team on the case.  The Foresight Programme (which looks 20 to 80 years into the future) was asked to answer the following two questions:

  • How might the risks of flooding and coastal erosion change in the UK over the next 100 years?
  • What are the best options for Government and the private sector for responding to the future challenges?

The Foresight Flooding and Coastal Defence Report came out in April 2004 and was built around four global growth scenarios: World Markets, National Enterprise, Local Stewardship and Global Sustainability. The Executive Summary can be found here.

World Markets is the global capitalism scenario with minimal mitigation of greenhouse gas emissions; National Enterprise is World Markets with protectionism; Local Stewardship is green utopia; and Global Sustainability is statist in nature.

Based on the four scenarios, Foresight produced estimated annual damage (EAD) figures out to 2080 for both fluvial (river in this case) and coastal flooding as well as what they called intra-urban flooding (pluvial, i.e. rainwater run-off, and groundwater).

Annual Average Flood Damage jpeg

For the World Markets scenario—the dash for growth and ignore carbon emissions one—flood damage is estimated to rise 20-fold by 2080. On a GDP basis the position at first glance looks a lot better with damage only rising by 50%.

Annual Average Flood Damage % of GDP jpeg

Against current annual average cost of £1.4 billion from floods, the report estimated that £800 million per annum was spent on flood and coastal defences. Moreover, it also calculated than an annual increase in above-inflation spending of £10 to £30 million would be required just to maintain flood risk at its current level.

The report then looked at a suite of policy measures. Some would be at the macro level in terms of carbon emission mitigation, others at the local level such as increased flood defence and flood proofing. Rather optimistically, the report believed that if all their micro measures where enacted, there would be a dramatic reduction in flood-related damage. Note ‘high’ risk means a greater than one in 75 chance of flooding in any given year.

People at Flood Risk jpeg

Finally, Foresight also realised that the private sector would likely take a much more hard-nosed approach to flood insurance going forward, with the result that the government may have to step in to fill a potential insurance void.

The availability of insurance to cover the costs of flood damage will vary depending on changes in risk and society’s ability to pay. Cover could range from a continuation of the current situation to progressive withdrawal of cover for areas at greatest risk of flooding. Government might have to consider how to respond to pressure to act as insurer of last resort if the insurance market withdrew cover from large parts of the UK, or if there was a major flood which the insurance market could not cover.

The issues raised by the 2004 reports were brought into sharp relief when the British insurance industry took a £3 billion hit in 2007 after major fluvial (river and sea) and pluvial (rain) related flooding. The 2007 floods were unusual in a numbers of ways:

  • The floods took place during the summer
  • Surface water flooding (pluvial) caused as much damage as river and coastal (fluvial)
  • 55,000 houses were flooded and 13 people died
  • Half a million people lost access to mains water and electricity
  • Insurance industry claims reached £3 billion and total damage over £5 billion

In response to the 2007 floods, the government commissioned a report by Sir Michael Pitt, which was published in June 2008 as the Pitt Review. You can find the Executive Summary here.

In conjunction with the review, Sir Michael Pitt requested an update of the Foresight Future Flooding Report that I referred to above. The new Foresight report contained a more pessimistic assessment of climate change impacts on flooding. In particular, it estimated higher sea level rise and rising precipitation leading to more fluvial and pluvial flooding as compared with the 2004 analysis. It did not, however, provide updated figures for estimated annual damage from flood.

Based on the experience of 2007 and the new numbers from Foresight, Pitt recommended that the government commit to a long-term approach to investment in flood risk management, planning up to 25 years ahead. Following Pitt’s recommendation, “Investing for the Future: Flood and Coastal Risk Management” was published by the Environment Agency in 2009, and this has provided the foundation for all cost-benefit decisions regarding flood defence investment since then.

At the same time, Pitt supported the maintenance of the status quo with regard to insurance provision as contained in the Association of British Insurer’s “Statement of Principles”. Under this agreement, the ABI agreed to continue providing insurance to ‘at risk’ households at, in effect a discounted price. Low risk households would foot the bill, being charged slightly more than their risk profile would warrant. The government, meanwhile, would agree to beef up flood defence, but would not get directly involved in either insurance provision or in back-stopping major catastrophe loss.

The ABI had other ideas. The 2007 floods saw 180,000 claims and insurance payouts of £3 billion. The worry for insurance executives was that if 2007 could produce a £3 billion loss event, then what could happen once climate change really accelerated? The possibility existed of an open-ended loss of inestimable proportions. The insurance industry can absorb large losses by just hiking premiums in future years, but a super-large tail risk loss event is a different matter. At a certain point, insurers can be knocked out of business, and thus not survive long enough to hike future premiums.

Faced with the ABI’s implicit threat to walk away from ‘at risk’ households and leave them uninsured, the government realised Pitt’s idea of a continuation of the status quo was a non-starter—and so was born Flood Re. I will look at this agreement in my next post, along with the cost-benefit choices the government is being forced to make with flood defences.

Flood Risk in the U.K.: What Does Mr. Market Think? (Part 4 You Ain’t Seen Nothing Yet)

The National Flood Risk Assessment  (NaFRA) of 2008, conducted by the Environment Agency (EA), calculates that 330,000 properties are at ‘significant’ risk (defined as one in 75 years) of fluvial flood in England. The survey is a bit long in the tooth nowadays, and I expect that if they repeated the assessment exercise today, more houses would fall into the ‘significant’ risk category.

In a similar vein, The Association of British Insurers’ (ABI) submission to the U.K. parliament talks of around 200,000 homes (some 1 to 2 percent of the total housing stock) that would now find it difficult to obtain flood insurance if open market conditions solely determined availability (and if they can’t get insurance, they won’t be able to support a mortgage).

For climate change “skeptics” who believe in free markets, the fact that the British insurance industry takes climate change as a given, and has done so for many years, is a difficult fact to face. In a forward to a report called “The Changing Climate for Insurers” back in 2004, The ABI’s then Head of General Insurance John Parker was unequivocal:

Climate change is no longer a marginal issue. We live with its effects every day. And we should prepare ourselves for its full impacts in the years ahead. It is time to bring planning for climate change into the mainstream of business life.

What the ABI is doing through requesting the government to create a new insurance arrangement after the expiry of the Statement of Principles agreement in June 2013 is to “prepare ourselves for (climate change’s) full impacts in the years ahead”. We can hardly say we were not warned.

We can also hardly say that climate change is alarmist nonsense or a socialist plot. The insurance industry is about as close to “red in tooth and claw” capitalism as one could get. And the message from Mr. Market in his insurance industry incarnation is very clear: climate change is coming to a place near you very soon—get used to it.

Yet the ABI has blurred the line between uninsurability and unafordability. Tim Hartford in his Financial Times’ “Undercover Economist” column sets out three hard-to-insure risks. First, genuine unknown unknowns, where the insurer has no idea of the shape of the frequency distribution and severity distribution. Second, the adverse selection situation, where there is an asymmetry of information acting against the insurer: those who know they are bad risks use their effective insider knowledge to seek out and profit from insurance. Finally, insurance that is just expensive. He puts flood insurance into the final category:

Now the third kind of hard-to-insure risk is stuff that’s expensive and happens quite often. I’m trying to buy a house, I’m nearly 40 and so I’m trying to buy insurance for my family in case I die or become too ill to work. This is perfectly possible: it’s just expensive, because it’s not unusual for middle-aged men to get seriously ill. This sounds like a much better description of allegedly uninsurable homes: if there is a one in five chance of a flood, and a flood is going to cost £50,000, don’t expect to pay less than £10,000 a year for flood insurance.

…..but unaffordability is not uninsurability. It’s insurable but expensive.

If these homes actually were uninsurable the government would need to step in and cut some kind of deal with the insurance industry – exactly the kind of deal that has lasted for the past few years and seems about to unravel. But if the problem is unaffordability, trying to solve it by cutting a deal with the insurance industry is just a way of obscuring what is really going on. The real solution is simple and stark: the government needs to decide whether it wants to pay people thousands of pounds a year to live in high-risk areas or not.

And in austerity Britain, no Chancellor of the Exchequer really wants to shoulder these extra payments. Continue reading

Flood Risk in the U.K.: What Does Mr. Market Think? (Part 3 The Information Game)

In my last post, we saw that the insurance industry has broken with the status quo because it realises that flood risk has entered into a new era. The stable frequency and loss distributions that underpinned their actuary-led calculations of the past are no more. The loss-related data that the industry laboriously collected in the past only gives insurers a limited ability to look into the future.

Nonetheless, if we only think of the pure insurance risk (as opposed to an insurer’s business model risk), insurance companies are really looking out only one year: when a home owner’s policy comes up for renewal each year, the insurer has the opportunity to change the terms and conditions of the policy including the premium and excess. And they could change the terms and conditions very aggressively—the equivalent of suspending coverage, just in disguise.

Given these factors, if an insurer can look out for that one year and capture a decent understanding of the risk, it should be protected from any massive loss event that blows it out of business. And if there is a big loss event and the insurance company is still standing, it can subsequently change the terms and conditions of the outstanding policies at the next yearly renewal including a hefty hike in the premiums.

Up until the floods of 2007, with their £3 billion-plus associated insurance pay-outs, the information in the hands of an insurer and a well-informed home owner would have not been that much different. Both would have had access (and still do have access) to the Environment Agency (EA)’s flood maps.

The flood maps are updated quarterly and give a risk assessment at the one in 100 and one in 1000 flood probability levels  for river flooding (an EA pamphlet on the flood map can be found here). On top of this, the EA provides the insurance industry with the National Flood Risk Assessment (NaFRA) data. As mentioned in a previous post, this is more specific in terms of its flood risk categories (an EA pamphlet on NaFRA can be found here) and underpins the Statement of Principles agreement between the Association of British Insurers and the government. I will repeat the risk category definitions once again:

  • Low risk: the chance of flooding each year is 0.5 per cent (1 in 200) or less
  • Moderate risk: the chance of flooding in any year is 1.3 per cent (1 in 75) or less but greater than 0.5 per cent (1 in 200)
  • Significant risk: the chance of flooding in any year is greater than 1.3 per cent (1 in 75)

A home owner may have more interest in the one-in-75 risk (available from NaFRA) rather than the one-in-100 risk (available from the EA on-line Flood Map) since this is the demarcation point used to differentiate between ‘significant’ risk and ‘moderate’ risk, and as a result drives insurance premiums levels. Moreover, this risk demarcation point gives an some indication of what ‘significant’ risk property owners may be in for after the expiry of the Statement of Principles agreement expires in June 2013. Continue reading

Flood Risk in the U.K.: What Does Mr. Market Think? (Part 2 An Actuary’s Nightmare)

In my previous post, I noted that strange things were happening in the flood insurance market. In short, the insurance industry no longer wants to extend the status quo (here):

The current agreement under which insurers continue to offer flood insurance to their existing customers will expire on 30 June 2013. The insurance industry has proposed a new a scheme to ensure customers can still buy affordable flood insurance, after this date. We are currently in talks with the Government about taking this forward.

In truth, they want to move some flood risk from one actor in the market to another. But before I look at that issue, I want to ask the question “why do they want to change the status quo?”

To do this, we need to take a quick detour through the theory of insurance. There is a nice little eight-minute youtube video that explains the theory of insurance here:

The core message in the video is the same as the core message of this blog: risk is the probability of an event times the cost of the event. Continue reading

Flood Risk in the U.K.: What Does Mr. Market Think? (Part 1 Five Million Homes at Risk and Rising)

Last week I attended an evening of talks given under the title “Extreme Weather and Floods” and hosted by the local sustainability group PAWS in the Thames side village of Pangbourne. The speakers were Professor Nigel Arnell,  Director of the Walker Climate Institute, Reading University, and Stuart Clarke, Principal Engineer and the senior officer for flood risk management at West Berkshire Council.

At the close of the Q&A at the end of the evening, the moderator encouraged the audience to mingle with the speakers and take the opportunity to ask any follow-up questions.  I ambled up to Professor Arnell to ask for a pdf copy of his Powerpoint slides, but before I could get to him he was grabbed by a late middle-aged man who wanted to vent his frustrations on his treatment by his insurance company (I shall call him Mr. Angry, and don’t blame him). The insurer was now demanding a £1,400 (about $2,100) annual insurance premium for flood risk cover and a £15,000 (about $23,000) excess for flood damage (the home owner has to pay the first £15,000 of damages before the insurer steps in). Result? He declined and his house now goes uninsured.

Flood insurance is a classic case of where climate change meets Mr. Market. At present, U.K. insurers have an agreement with the government known as the Statement of Principles on the Provision of Flood Insurance (a copy can be found at the Association of British Insurers here) that can be summarised as Mr Market Lite.

The border line between capitalism ‘red in tooth and claw’ and the socialization of risk is a one-in-75 year flood event (a 1.3% chance of flooding in an individual year). If you are in a flood zone which is estimated to have a flood risk greater than one in 75 years and the government has no plan to beef up flood defences over the next 5 years, then ‘tough’—you have to make an accommodation with Mr. Market. If—like Mr. Angry of Pangbourne above—Mr. Market’s quote is in the stratosphere, then you may be forced to turn it down and go uninsured. Note that if your property was built after 1 January 2009, it automatically falls outside of this agreement between the insurers and the government.

You can see the definitions of ‘low’, ‘moderate’ and ‘significant’ risk in the Environment Agency’s “Flooding in England: A National Assessment of Risk” here (click for larger image).

Flood Risk Categories jpeg

Continue reading