From rain to recriminations

After the rains come the recriminations. The recent floods have left the insurance industry with a bill of three billion pounds plus, and someone has got to pay. The Association of British Insurers (ABI) wants £150 million spent on maintaining Britain’s flood defences on top of the £800 million the government has already pledged to spend in 2010 and 2011. ABI also called for ‘some reform’ to the Environment Agency, saying it should have a statutory duty to reduce flood risk to people and property. Naturally, once the government and the industry has stopped bickering, it will be the policy holder who will bear the brunt in the form of higher premiums.

Braced for rises

The tone was set by Norwich Union and Lloyds TSB, who immediately announced that they were to put up the cost of household insurance by an average of 10 per cent following the floods. The price increases will apply to all customers, and not just those hit by flooding. But it’s when policy holders that have been hit come to renew their insurance or sell their houses that they’ll face bigger problems.

Millions of people in flood-hit areas are braced for rises of up to 50 per cent in home insurance premiums, and hundreds of thousands of people could be stuck with homes they can’t sell because they are refused insurance. This could see the value of their homes slump by 80 per cent because their insurers may refuse to cover them for future claims. It is likely those that have been flooded many times in the past five years will be more often rebuffed by traditional insurers and will have to turn to more specialist providers, which will naturally prove very expensive. Premium price differences between poorer and more affluent regions may also have to widen because the cost of property and content claims varies so largely.

A pledge to provide cover

Insurers have pledged to continue to provide cover to home owners and small businesses at risk of flooding as long as the government continues to invest in flood defences. They warned that they could be forced to take a harsher line on insuring new houses built on flood plains. Then we learn that ministers plan to construct three million homes by 2020 and insisted that some would have to be built on flood plains.

Insurers want all new housing developments to be away from flood-prone areas to ensure that insurance remains widely available. They have an agreement with the government to continue to cover existing customers in high-risk areas – where there is deemed to be a 1.3 per cent chance of a flood every year – as long as improvements to flood protection are planned within the next five years.

While insurers must continue to offer buildings and contents cover; they reserve the right to withdraw the flood element in extreme cases where homes are flooded regularly.

Serious failures

According to a recent National Audit Office (NAO) investigation, there are serious failures in the Environment Agency’s policing of the situation. The NAO found two-thirds of England’s flood defence systems have not been properly maintained. There are 2.2 million homes at risk of flooding – 270,000 of which are at severe risk – but this could increase to 3.5 million by the end of the century unless considerable investment is made.

This will have a knock-on effect on the value of the property, leading to a reduction in value of up to 80 per cent. Even where they continue to cover floods, insurers could hike the premiums or the excess to such high levels that homes are, in effect, blacklisted. More than 250,000 properties are situated in high-risk areas and could therefore be caught by this opt-out in future. Consumers in high-risk areas already pay an average of 60 per cent more for buildings and contents insurance. In some cases the excess for flood damage may be as much as £20,000, compared with a standard excess of £100.

Broker awareness key

As a broker, you need to be aware of the current situation and need to be able to advise on the most suitable buildings and contents insurance. You should also be able to advise on what grants may be available to buyers. The Department of the Environment, Food and Rural Affairs (Defra) has launched a pilot scheme offering grants to individual households so people can improve their own flood defences. Insurers will also expect people who live in high-risk areas to take steps towards minimising the damage caused by flooding. It is conceivable in the current ‘Treating Customers Fairly’ environment that failure to advise that a property is on a flood plain or prone to likely hikes in insurance cover could mean you end up picking up the tab. It’s also vital that brokers consider the insurance company they choose for a client in the light of the potential hike in rates, as well as considering a whole of market comparison as opposed to single market quotes.

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