Availability of data

Perhaps because, in the UK, flood cover is provided by private companies there has been little publicly funded research into the cost, availability and take up rates of flood insurance. Anecdotal evidence is available about the increased cost of insurance in flooded areas: One property owner, moderately at risk of flooding and with a storm claim had received quotes varying from £819 to £400 from different insurers (Which?, 2005) despite explaining to each one that her house is built up several metres from the ground (compare this to an “average” premium of about £300). Excesses of £5,000 or

even more are being applied to some high-risk properties (Crichton, 2005). Crichton

(2005) also noted that the chairman of the All Party Parliamentary Group on Insurance and Financial Services, complained to the ABI that some constituents had suffered from increases in premium of up to 250%. Further evidence from Crichton (2005) citing Datamonitor, suggests that the average premium for a flood risk postcode is double the average household at £600.

There is very little formal and publicly available research, however, that quantifies the increased cost a flood victim can expect to pay for home insurance. Two sources that attempt to do so are Moneysupermarket.com (Modcock, 2003) and the Lewes flood action group (Lewes Flood Action Group, 2004). There is an important distinction in the approaches of these two studies. The first considers flood risk as defined by flood mapping, the second looks at the experience of properties actually flooded where, presumably, claims have been made and the insurer and insured have a joint history.

Moneysupermarket.com carried out a survey of insurance quotes for flood risk postcodes versus flood free ones (Modcock, 2003). They reported an increase of up to 60% but also said that by shopping around substantial savings could be made.

Lewes flood action group carried out a survey of 800 properties in the aftermath of severe flooding in 2000. The survey was carried out in 2002/2003 and most of the renewals should have been covered under the original “gentlemen’s agreement” thus refusal should have been rare. Two hundred and fifty-four responses were received, a good response rate (not necessarily an unbiased one), which included both business and residential properties (not all commercial properties came under the “gentlemen’s agreement”). Forty-five refusals of cover were reported, the majority of these refusals were for residential properties. Under the conservative assumption that all householders who had been refused insurance replied to the survey this represents 6% of the flooded properties, (18% of respondents). Just under half of the respondents reported significant changes.

While these results must be approached with caution they do represent the only systematic evidence about post flood insurance rates paid by householders. A conservative estimate is that 14% of policyholders suffered significant changes alternatively it may be that the figure is as high as 45%. The converse view is that over half of the flood victims who responded reported no substantial change. The survey does not record whether these properties remain uninsured or went on to gain cover from somewhere else.

The most important thing that these results demonstrate is the inconsistency displayed by insurers. It reinforces the desire to understand the insurance market from a consumer’s point of view because knowledge of the policies of the various insurers and their national coverage rates will not tell us what the home owners in the floodplain are actually paying for cover. Crucially, if it is not possible to detect and measure a flood insurance premium loading due to flooding or flood risk then the hypothesis that increased premiums will have an impact on property prices cannot be tested.

5.7 SUMMARY

In the UK, flood insurance is included in the standard household policy. This is a fairly unique position worldwide. Most countries have a much smaller and more specialised flood insurance regime. The cover in the UK is provided by private companies and is protected by a statement of principles that ensures that most homes can get insurance. There are some properties that fall outside the agreement, notably new build and frequently flooded property with no prospect of new defences.

The increase in severe weather claims in the last decade has put severe pressure on insurers to raise rates for high flood risk areas. Competitive pressure within the wider domestic property insurance market makes the targeting of lower risk policyholders desirable. These factors and other recent developments are predicted to result in a closer link of premium to risk in all areas and particularly to flood risk.

There is very little research into the impact of these changes on the homeowner in flooded or flood risk areas. The available evidence suggests that, because insurers are

pursuing different pricing policies, some policyholders are suffering large cost increases while others are not. A true measure of the increased insurance cost of flooding to homeowners can come only from the householders themselves. Therefore a survey of homeowners will be necessary in order to assess the scale of any increases in the cost of flood insurance and the prevalence of exclusion from flood cover. The survey design is presented in chapter 7.

The availability and cost of property insurance is an important factor in the sale of domestic property. Studies in the UK have identified that if insurance is not available the property transfer may be problematic. However, previous research has not established a causal model which explains the action of insurance on property value in the unique UK market. Theoretical models of utility predict that the purchase of insurance reflects the willingness of property owners to avoid the risk of flood. These models are not directly applicable in the UK for both theoretical and practical reasons. It will therefore be necessary to develop a new conceptual model for the action of the cost and availability of flood insurance in the UK market. This development is presented in chapter 6.