Flooding is the biggest natural disaster risk in England. Flood risk is expected to increase due to climate change and continued development of floodplains for residential and commercial property, which increases the exposure of homes and businesses. Addressing the causes and consequences of flooding is very important and we therefore welcome the recent efforts by the UK Government and the insurance industry to reform the approach to flood insurance in England. The proposed new scheme, Flood Re, offers some promising, innovative approaches for dealing with affordability and availability, but we argue that it has fundamental shortcomings.
First, the design of the Flood Re scheme, which is expected to last until at least 2035, has not taken into account adequately, if at all, how flood risk is being affected by climate change. For this reason, it is likely to be put under increasing pressure and may prove to be unsustainable because the number of properties in future that will be at high probability of flooding has been significantly underestimated.
Second, the design and operation of an insurance scheme should have good risk management behaviour in mind and should be designed to avoid moral hazard, particularly by the Government and local communities. Private flood insurance will only have a future if it is embedded in a comprehensive risk management programme that responds to changes in risk over time. Yet, the approach proposed by the government does not give enough consideration to how the Flood Re scheme will complement Government action on flood risk management. The existing approach, governed by the Statement of Principles on the Provision on Flood Insurance, with all its limitations, did provide links between flood insurance and spending on flood defences, improvements in planning regulations, and access to flood risk information. It is not clear whether the new scheme and Memorandum of Understanding between the Government and insurance industry will strengthen these links. It is critical that governments recognise that insurance alone, without complementary risk reduction efforts, is not a sustainable solution, particularly in the context of climate change adaptation. Strengthening the link between flood insurance and risk reduction will require innovation and a willingness to learn from examples elsewhere in the world. For instance, there are examples from other countries, such as Finland, where risk reduction measures at the Government and/or community level are conditions for insurance being made available. This is a complex but important area, where more innovation by industry and wider stakeholders, including property developers and planners, will be needed.
Third, there needs to be more consideration of the roles that other stakeholders, such as developers and mortgage providers, can play. Flood insurance provides significant benefits for these stakeholders, potentially creating moral hazard, while their role in promoting risk reduction is not formalised. If the Government is moving into a new era of flood insurance, as claimed by the consultation document, then this important aspect should be considered.
Fourth, we question the decision to exclude small and medium enterprises (SMEs) from the proposals outlined in the consultation document. SMEs play a key role in driving a community’s economy, so their ability to access flood insurance, and therefore remain solvent and trading, has wider economic implications.
Finally, while we welcome the recognition of risk-based pricing as a guiding principle for flood insurance, it remains unclear whether the Government and insurance industry has taken into account the consequences for affordability of a continued rise in flood risk for many properties. In addition, the transition process towards a completely free market after 20 to 25 years, when Flood Re will be phased out, is not described. It is very unclear why it is assumed that insurance prices will remain affordable and available to all households after this period.