Flood insurance – fit for the future?

Dr. Swenja Surminski, 05/04/2016

Overview

• Flood insurance in the UK• The role of Flood Re• Is flood insurance “fit for the future”?

The story• We have a problem: flood losses are rising (for a variety

of reasons). • We have different views on who should pay for flood

damage: solidarity versus risk-based concept. • There are growing concerns about affordability and

availability of flood insurance. • We can’t avoid flooding, but need to manage it. It is often

unclear who can actually deliver flood risk management. • In order to be fit for the future: any insurance scheme

that wants to remain viable needs to deliver two results – risk transfer and risk management.

• What is the role of insurance?

Insured flood risk losses

Bank of England/ PRA, 2015

The UK situation

• Underwriting is provided by the private sector, while government maintains a role in terms of flood risk information and flood management through partnership approach

• Enshrined in the Statement of Principles between government and industry

• High rate of market penetration (91% buildings/75% contents), but not compulsory

• Move to new system ‘Flood Re’ in April 2016

UK flood insurance

Who pays for whom?

Quelle: Defra, 2013

Flood Re starts in April 2016

“Fit for the Future?”

• What will be the impact of Flood Re? • How will the insurance market respond?• Are we going to continue building in flood risk areas?• Will we have a better understanding of all types of flood

risk? • Will flood risk management efforts be sufficient?• Will we see more resilience?

Climate change impacts • Flood losses across the EU are expected to increase from €4.2bn

per year (2000-2012) to €23.5bn by 2050. • Insured losses are expected to increase from €1.6bn per year

(2000-2012) to €4.6bn by 2050.

Present and projected flood losses for return periods across the EU form Jongman et al. (2014)

Pricing and Climate Change

Based on Jenkins et.al. (2016), cited in Prudential Regulation Authority and Bank of England. The impact of climate change on the UK insurance sector (2015)

How to design flood insurance fit for the future?

Source: Defra (2011) ‘Principles for flood insurance’

Encouraging flood risk management?

Surminski and Eldridge, 2014

Flood Re: what levers for flood risk management?

Resilient Repair?

Risk Information?

Incentivising flood protection, planning

policy ?

Incentives for resilience

measures?

The risk reduction and resilience angle

Insurance is widely considered as an economic incentive for prevention and risk reduction. The practical evidence for this is limited, barriers are well-known.

→ What is needed to proceed? Some examples: • Advice and information for clients (flood alert)• The WIND-advice service from Provinzial in Germany • Resilient repairs

→ Does it work???

Some recommendations• More transparency and data sharing – why is Flood Re ‘hidden’

from those who are covered?• A clear transition plan for Flood Re, including FRM investment

levels and how risk reflective pricing will be achieved particularly with the expected impacts of climate change.

• More incentives and information needed for policyholders to minimise their risk through property resilience measures e.g. improved terms, reduced premiums, community strategy.

• A clear message to national and local government that flood risk needs to be addressed.

• Use of resilient reinstatement when paying claims. • Bring mortgage providers and developers to the table.

Thank you for your attention.

For further information:

s.surminski@lse.ac.uk