A proposed new scheme for flood insurance in the UK may not be sustainable because the impacts of climate change have not been taken into account, experts have warned.
The Centre for Climate Change Economics and Policy, the Grantham Research Institute on Climate Change and the Environment at the London School of Economics and Political Science combined forces to respond to a consultation by the Department for Environment, Food and Rural Affairs on the new scheme.
They conclude that the scheme does not make sufficient allowance for increases in flood risk due to climate change and the continued development of floodplains for residential and commercial property.
The new scheme, FloodRe, has been put forward by the government and the Association of British Insurers (ABI) as an alternative way of offering flood insurance from 2015 to an estimated 500,000 UK homeowners who live in areas of high flood risk. About 6M residential and non-residential properties in the UK are thought to be exposed to some level of coastal, river or surface water flood risk.
To cover the claims for losses caused by damage to homes at high risk of flooding, the premiums for all residential property insurance policies – including those for homeowners at moderate, low or no risk of flooding – will include a levy of £10.50. This charge will explicitly provide FloodRe with an estimated £180M annually, which the ABI considers is equivalent to the total implicit subsidy from existing policy-holders to cover claims from the 500,000 homes at most risk of flooding.
The FloodRe scheme, outlined in a Memorandum of Understanding between the government and the ABI, is intended to replace the current gentlemen’s agreement between insurance companies and the government known as the Statement of Principles on the Provision of Flood Insurance, through which cover is offered to most homeowners whose properties are not located in areas of significant flood risk.
But the paper points out that the Impact Assessment for the scheme does not mention the effect of climate change.
The UK Climate Change Risk Assessment, published by the government in January 2012, indicated that the number of residential properties in England and Wales exposed to a significant risk of coastal or river flooding could increase from 370,000 in 2008 to between 450,000 and 800,000 by the 2020s.
The paper states: “The design of the FloodRe 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 moderate and high probability of flooding has been significantly underestimated.”
It also points out that the proposals for the new scheme make no reference to the role flood insurance should play in the National Adaptation Programme.
The paper states: “The FloodRe scheme also does not offer integrated mechanisms for flood insurance to play its part in climate change adaptation. This means that it is unlikely to provide a long-term solution to the growing problem of uninsurable properties.”
It adds: “The design and operation of an insurance scheme should have good risk management behaviour in mind, not just by the insured, but also 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, which would also have clear advantages beyond the issue of insurance.”
“Not enough consideration has been given to how the proposed FloodRe system will complement government action on flood risk management.
“The existing scheme, governed by the Statement of Principles on the Provision of 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 Memorandum of Understanding between the government and insurance industry will strengthen these links.”