In recent weeks, the insurance industry’s Flood Re framework has once again been widely acknowledged by ministers and MPs as a workable and pragmatic long-term solution to the challenge of ensuring householders can access affordable and accessible flood insurance.
However, Flood Re has also been subject to a reasonable amount of uninformed criticism regarding the extent to which it ‘takes account of climate change’. So let’s be clear from the off: Flood Re has been designed with climate change fully in mind.
In the interests of reassuring those sceptical of the scheme’s climate credentials, I thought it would be useful to dispel three myths recently reported about Flood Re.
1. Flood Re will only protect 500,000 households, but many more than this will be at risk in the future as the climate changes.
500,000 homes is not Flood Re’s maximum capacity, but simply the insurance industry’s best estimate of how many households could benefit from Flood Re when it opens for business in 2015.
Even this number is uncertain – Flood Re could see any number of homes between 200,000 and 700,000 sent in its direction when it is up and running; that will be up to the market.
Managing this uncertainty is at the heart of the design of Flood Re. Most flood insurance schemes around the world limit support to a predefined list of homes (for example, those living in ‘significant’ risk zones), but Flood Re is different. Flood Re is designed to be dynamic by allowing insurers to put any home into Flood Re at a set level of affordable premium. Put simply, there is no upper limit to the number of households that can benefit from Flood Re – just a limit on the flood premiums that they will pay as a result of Flood Re’s existence.
2. Flood Re will fail if climate change leads to more and more households within the scheme and more big floods happening.
Flood Re will have two sources of income – capped flood premiums from those in the scheme, and a £180m levy on the insurance industry. This income needs to be able to meet the claims of those in Flood Re.
Having more homes in Flood Re not only means higher claim costs, but higher premium income as well, which means the impact of more homes in the fund is not as large as it might seem.
Of course, if flooding costs significantly more in the future than currently predicted, more money will be needed eventually to pay for this – as is the case for any type of risk. But Flood Re has the flexibility to allow either the premiums charged to those in the scheme, or the industry levy, to be changed. Ministers, in consultation with Flood Re directors, can therefore make a decision about whether any rising flood costs are paid for by those most affected, or shared by society. Flood Re provides the simple yet effective mechanism to allow such crucial climate change decisions to be made.
3. Flood Re discourages action to manage the increasing risks of flooding.
Some commentators have made a quite understandable argument that subsidising flood insurance reduces the financial incentive for individuals to manage their flood risk, and reduces the pressure on Government to do the same. From a theoretical economic perspective this is of course correct, but I am not sure anyone would prefer the alternative: a free market in which 200,000 households have the ultimate incentive to take action, but with no prospect of finding affordable home insurance.
But that does not mean Flood Re is simply going to ignore the issue. Firstly, in the negotiations between the ABI and the Government to agree Flood Re, a critical point for the industry was to commit Government to continued, sustained investment in flood defences. In the 2013 Spending Review, Government’s capital spending on flood risk management was increased substantially, allowing the ABI to agree to take Flood Re forward.
Secondly, there are other, equally strong incentives, beyond just the financial type, for people to manage their flood risk. Anyone with experience of flooding knows that the emotional impact is dreadful, and that minimising the risk of going through the pain and stress again is as much a driver of action as the financial impact. And there is no reason why continued access to Flood Re and affordable insurance cannot be, within reason, conditional on an insurer’s customer taking any such action necessary to reduce the impact of flooding. This will be one of the issues Parliamentarians will discuss in the weeks ahead.
Flexible solutions
Flood Re is not a silver bullet that will render the flooding impact of climate change painless. After all, if flooding costs more in the future then the country has to pay one way or the other. Whether the additional costs are borne by those at high risk (reducing affordability) or by all of us paying a little bit more it is, like all issues of taxation, fundamentally a political decision for elected Ministers. Either way, Flood Re has the flexibility to manage this.
Ultimately, the best way for flood risk to be managed in line with climate change is through targeted investment in flood defences and a zero tolerance approach to inappropriate development. Both these issues are high on the Government’s agenda and have been critical to the agreement on Flood Re. But for those people already living with the increasing risk of flooding in the UK, Flood Re’s contribution to helping manage climate change is already beyond doubt.
Matt Cullen is the ABI’s Policy Advisor, Flooding