Why now is the time to reconsider your flood-risk assessments

By Jarno Seegers

Flooding has risen back to the top of the agenda for a number of reasons, not the least of which is the approaching  deadline on June 30^th this year. On this date the estimated 6 million householders whose homes are considered to be at risk of flooding (of which some 560,000 are classified as above the 1 in 75 level) may find it difficult to renew their annual insurance policies, as it will be just 12 months before the current ‘ABI Statement of Principles’ on flooding expires.

As a result, we are seeing increased levels of media attention to flood risk insurance, as well as increasing concerns amongst the public and politicians alike.

In various iterations since 2000, the Statement of Principles has established a mechanism to ensure flood insurance remains available for the majority of homes at risk. Whilst it has delivered on its promise, the industry has long recognised that there are some serious flaws to the agreement and I believe that it is time to look for a more sustainable long term solution. Indeed, the ABI has made clear in its most recent response to government that the agreement will not be renewed in 2013.

Many insurers have worked hard to ensure flood insurance remains affordable and available despite the rising flood risk within the UK. However, with the prospect of a move to a free market model, where insurance is priced purely by the assessment of risk and driven by competition, the industry faces the challenge of accurately assessing flood risk levels and integrating these into their risk, exposure and pricing models. The scope of this ‘new’ market is not insubstantial, with some suggesting homes worth up to £214bn could fall into this ‘new’ market segment.

UK properties already suffer approximately £1.3bn in annual damage from water and sea flooding, not to mention localised flooding incidents by the country’s ageing infrastructure.  So with the risk of flooding on the increase it’s clear that insurers are going to need to utilise accurate data to assess flood risk if they are going to compete effectively and manage their risk and exposure properly. Assessing flood risk according to the nearest postcode centroid simply won’t provide an accurate enough assessment of real risk, nor will it support competitive market pricing when competitors have the ability to evaluate the propensity to flood according to the specific location and elevation of an individual property.

It’s well known that there are a significant number of properties that technically fall in or close to a high-risk zone but enjoy a more elevated position and are unlikely to be affected by flooding in the vicinity. It will therefore be possible for the insurer with the most detailed location intelligence to offer the best value and capture what could well be lucrative long-term business. And just as importantly, to identify the most high-risk customers to ensure the premium they are asked to pay is a fair contribution in relation to the heightened level of risk that they entail.

Insurers must manage flood risk more effectively

It’s also worth considering the value of improved locational data in terms of exposure density management. With the ABI estimating the average claim following the 2007 floods being between £20,000 and £40,000, insurers clearly need to be able to measure and manage their exposure density effectively.

Ensuring that risk is estimated as accurately as possible is of course nothing new. But the impending deadline and the potential for climate change serves as a reminder that insurers can’t be complacent. Those with the greatest insight into their customers and associated risk profiles will always derive a competitive advantage, whatever changes occur.