Tag Archives: UK flood map

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 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

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