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Insurance in countries throughout the world
Belgium/Italy/French/German system. General exclusion of flood cover.
Flood cover can be offered as an option, and this gives insurers the opportunity to underwrite and price or decline each risk on its merits. Optional cover is very subject to adverse selection. Only those who perceive a risk will buy it and the insurer is likely to end up with an unbalanced book of high risk business. On the other hand, people on high ground may not buy flood insurance, but are still at risk, as the residents of Baiersdorf in Bavaria, found in July 2007. Rainfall caused €70m of flooding in over a thousand houses and a business park. Most were uninsured.
Australia/Canada system. General exclusion of cover for flooding from rivers and the sea
Cover is still provided for flooding due to surface water, burst pipes or sewage backup on the grounds that this could happen anywhere, whereas flooding is considered inevitable in zones close to rivers or the coast.
Sweden/Norway system. Litigation
Insurers can recover the costs of flood damage due to planning decisions or inadequate drainage. This can be an effective way to influence the behaviour of planning authorities and water utilities.
UK system. “Statement of Principles”
Under the “Statement of Principles”, the industry has agreed to maintain flood cover for existing customers (for properties built before 2010) until 2013 but say this deadline will not be extended. Thereafter, there could be problems with availability or affordability of insurance especially where the flood hazard is greater than the 100 year return period. Where cover is given at all, there is also likely to be much greater use of substantial excesses or deductibles. One insurer already applies an excess equivalent to ten per cent of the previous flood claim. It should be noted that if the excess exceeds £1,000, the policy is no longer adequate security for a mortgage in the UK, and this could result in widespread foreclosures.
Scottish system. A partnership
The Scottish Planning Policy SPP7 was produced in consultation with the insurance industry. It has a number of features, including:
- A general presumption against building where the flood hazard is greater than the 1 in 200 year flood event.
- A risk matrix similar to the insurance template so that vulnerable properties are not permitted where the risk exceeds the levels in the insurance template.
As a result there has been almost no new building in flood hazard areas since 1995 and the proportion of properties in flood hazard areas of Scotland (other than Moray) is much lower than any other part of Britain. The Scottish Government has pledged to protect all properties against the 100 year river or coastal flood by the end of 2008, and apart from Moray it is well on the way to achieving this. Scottish achievements have passed apparently unnoticed by English based insurers, but two Scottish based insurers have reduced their premiums accordingly.
USA system. Government intervention
The government has mapped areas with a flood hazard exceeding the 100 year return period. Flood insurance in those areas is effectively underwritten by the government under the National Flood Insurance Program (NFIP) which collects the premiums from insurers and pays insurers for the claims they settle. The program was introduced in some haste, despite Gilbert White’s protests and the effect has been to promote economic development and settlement in hazardous areas.
To stimulate take up, insurance has been made compulsory for those with mortgages. However after a flooding event in northern Vermont in 1998, of the more than 1,500 victims of the disaster, FEMA found that 84 percent of the homeowners in flood-hazard areas did not have insurance - even though 45 percent had been required to purchase such coverage.
This despite the fact that flood hazards are growing in the USA due to climate change and human interference. For example, natural marshes around New Orleans could have protected the city against the worst damage from hurricane Katrina in August 2005, but they have been removed by development and saline intrusion. The same is happening to the bayou south of Houston, through which pass 25 per cent of the nation’s oil supplies.
The 2,000 miles of levees on the Mississippi reduce sediment deposits into the sea and this sediment could have given protection against storms and saline intrusion.
After huge losses to the flood insurance program, flood zones and premiums were changed from 19th January 2010, resulting in substantial premium increases for those in the highest hazard zones. NFIP is in debt to the tune of $18bn, due to the hurricanes in summer 2005. It is estimated that the Mississippi floods in 2011 will double that figure.
Ontario system. Enforced relocation
Following Hurricane Hazel in 1954 it was decided to completely revise the way government handled flood risks.
One consequence was that under new legislation in 1960, no new building or flood defence work should take place in flood hazard areas and to ban the sale of any property in such areas to anyone other than the local authority which would buy the property, demolish it and turn the site into parkland. This method has since been copied in parts of the USA.
Irish system. In transition
Ireland has the highest household insurance penetration in the world, with some 98 percent of households having flood insurance cover. Until 2009, Ireland allowed unrestricted building in flood hazard areas, but following a series of major floods, in November 2000, February 2002, November 2002 and October 2004, they issued their first planning guidelines for flood in November 2009, the same month as the most serious Irish floods to date, costing insurers €244m. These planning guidelines totally ignored the pleas from the insurance industry to government to resist pressure from property developers, and in effect could allow floodplain development to continue almost as before.
The Netherlands. Private flood insurance is illegal
This avoids the social problems caused by problems with availability and affordability of insurance, but limits the country’s access to global reinsurance facilities.
Japan. Standard rates for all. In transition
Japan has had a market tariff agreement under which every insurer charged the same rates for flood regardless of the risk. Following the Japanese change to sustainable flood management, it has been realised that insurance has a major role to play in providing a disincentive to living in flood hazard areas. The insurance market is now in transition to more selective underwriting but is hampered by a lack of statistical data.
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