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
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).