Tag Archives: The Pitt Review

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.