So, we are only six weeks into the New Year and we’ve already had some pretty extreme weather. One of the warmest January days on record was followed a couple of weeks later by a large blanket of snow affecting large swathes of the country.
Sandwiched in between, many places experienced a lot of rain, leaving thousands of homes threatened by flooding. And according to scientists, these freakier episodes of weather are only going to get more frequent as global warming and climate change begin to have a greater impact on the world around us.
You only have to travel to Gloucestershire and ask the people of Tewkesbury about the risk of flooding. Or maybe head a bit further north to Doncaster, Sheffield or Hull.
All these places have felt the power of nature over the past eight months; twice in the case of Tewkesbury. However, in the aftermath of these disasters, one aspect featured quite prominently in people’s minds – insurance.
After the Summer 2007 floods, those who had insurance put in 130,000 claims (100,000 residential, 20,000 commercial and 10,000 motor claims) to the tune of £3 billion. But for those who did not have cover, they were left to put their lives back together with whatever the waters didn’t take.
The worrying thing though, from a financial services point of view, was the sheer number of those who didn’t have insurance – one figure put the number in Hull at 25 per cent of the 37,000 properties affected.
The right level of cover is key
From a mortgage intermediary’s point of view, insurance has never before received the billing it has now. Under the Financial Services Authority’s (FSA) ‘Treating Customers Fairly’ initiative, advisers must show that they have considered their clients’ insurance needs and many intermediaries are having to adjust the way they think to ensure that they comply with the regulator.
According to Jon Craven, head of mortgage intermediaries at Halifax General Insurance, getting the right level of cover is key. He said: “Selling general insurance (GI) is pretty straightforward. Most insurance policies will cover standard flood risk.
"However, you need to get the right level of cover as if you are underinsured then you might not get all the repairs paid for, and they can be pretty expensive. Therefore, you really need to make sure that the cover is right.”
Left high and dry
However, 2008 marks a potential watershed for flood insurance which could leave those who have been hit hard by the recent floods high and dry.
The argument centres around an agreement between the government and the insurance industry to provide cover for those who have already been the victims of flooding, as long as the government ensures that it invests in adequate flood defences. Introduced in 2002, the accord is looked at every year by the insurance sector, headed by the Association of British Insurers (ABI), with a major review undertaken every three years.
With a major review due in 2008, a potential shift in the availability of flood cover could occur in the next few months which has the ability to leave thousands with uninsurable properties. And an uninsurable property means an unmortgageable property.
The noises coming from the ABI are not encouraging. Spokesperson, Malcolm Tarling, says: “We have reiterated our message to the government that it has to keep up with investment in flood defences.
"Insurance is still widely available and there is still the agreement in place which means that people who have been flooded can still get cover, if there are adequate flood defences in place.
“The concern going forward though is that the defences need to be improved in many areas and other areas with defences already in place need urgent repairs.
If the government doesn’t maintain the levels of investment then we are going to run the risk of higher insurance premiums for people and, in some areas, they are not going to be able to get cover at all.”
Drainage
For the half a million homes already categorised as ‘high risk’ by the Environment Agency (seen as having a one in 75 chance or greater of being flooded in a year), this means up to 30 per cent higher premiums.
However, as a result of the review into last year’s Summer floods, which concluded that two-thirds of those affected were flooded due to inadequate drainage rather than overflowing river banks, the number of people considered to be ‘high risk’ is set to expand dramatically.
According to research quoted by The Sunday Times recently, potentially another 500,000 homes could be added to this insurance blacklist.
Catherine Evans, policy manager for flood incident management at the Environment Agency, admits that drainage has been an often forgotten issue.
“Generally as a country we have not paid enough attention to drainage as the responsibility falls over so many agencies. We don’t have the authority and it usually falls to local authorities and a wide range of other agencies to tackle it. The organisation is disparate and that is something that needs to be resolved.
However, as the conclusion of the Summer 2007 report mentions: ‘The strategic lessons identified from the Summer floods are not new.’
Therefore, while inadequate drainage has been found to be a problem once more, a lack of co-ordination was again critical in the events that unfolded.
Introducing the report, its chairman, Sir John Harman, wrote: ‘We need the help of the government to make strategic changes in how flood risk is managed, and a long-term strategy for investment in the context of a changing climate.
'We need a clear co-ordinating framework to deal with flood risk from surface water drains and sewers, which were the source of flooding for two-thirds of homes this Summer.’
Asking for trouble
Craven explains that a 25-year strategy for investment and management of flood risk has been proposed by the insurance industry but a ‘centralised commitment’ from the government is needed to ensure it works.
However, strategic flaws have been highlighted and not acted upon before so how will things be different in the future?
Moreover, how can government policy on flooding be co-ordinated with the plan to build three million new homes by 2020, many of which will be built on flood plains? Surely this is asking for trouble?
Evans insists that building on flood plains must be a last resort option. He explains: “Our stance is to not build on them, but if flood plains are the only option then the developments must have adequate flooding protection considered.”
However, Tarling pulls no punches on the subject, and says: “The availability of suitable land keeps falling but the pressures of demand keep going up and we are going to get to a potential collision point.
"We are against the building of new homes in high risk areas as it is foolish. You have to question whether some of these properties are insurable and if you can’t get insurance you could see a situation where there is a total stagnation of the housing market in some areas.”
Far from resolved
So, have we potentially reached the era where some properties have become uninsurable? If the 2002 agreement ends this year, there is the possibility that one million ‘high risk’ homes could struggle to get cover.
While Craven insists this is still a long way off, he admits the issue is far from resolved. He says: “It is unlikely but ultimately it is a commercial decision so the government needs to deliver certainty for the wider industry.
"That’s why the government needs to work with everyone to get a strategy in place. It’s in no one’s interest to have people sat in properties that are worthless and while it’s a doomsday scenario, we can’t be too complacent.”
Therefore, the next few months are going to be a critical time for the insurance industry, as well as for the millions of home owners up and down the country.
This means that the role of the mortgage and GI intermediary in securing the appropriate insurance product has never been more important and it will need you, the broker, to ensure that the necessary checks are carried out to make the right decision.
Should flood insurance products become harder to come by, the skills that mortgage intermediaries possess will be vital in securing the best deal for the client to ensure the dream home you help them achieve doesn’t become a nightmare.
