Insurance in a Risky World - Essay Example

FLOOD INSURANCE By Location Flood Insurance Introduction Flooding is becoming a major risk and increasing common in many parts of the UK such as Nottingham. Many people tend to fear investing or buy houses in such parts due to the risk of losing properties due to the flooding. This is because apart from the hassle and heartache, the cost incurred in the cleanup process is extremely high. However, there is no big risk to stop one from buying a house or starting a business these flooding regions since the insurance department in the UK has established flood insurance. Flood insurance is a standard part the insurance body includes in one’s buildings insurance. Flood insurance reduces the fear to purchase a house in flood risk areas since it covers one building and all his or her property against damage that flooding can cause. This paper is a report to a friend who is thinking of buying a house on Trent Road, Beeston, Nottingham NG9 1LQ, but is worried about the likely cost and availability of buildings insurance to cover the risk of flooding (Liedtke 2007, P. 7). The aim of the report is enlightening her about the factors to consider whether to buy an insurance cover and the factors that may affect the availability and likely price of insurance against flood risk in the next three years. There is no need to worry or fear buying a house on Trent Road, Beeston, Nottingham NG9 1LQ. This is because one is able to buy an insurance cover for his or her house and its contents. The insurance cover is advantageous since it will cover a number of flooding events such as a canal or a river bursting its banks, sea flooding caused by high tide or storms, and ground or surface water flooding caused by heavy rains. It is acknowledgeable that flooding results in damage and loss of properties, forcing people to incur unexpected costs, replacing the damaged and the lost properties. Although buying a house on Trent Road, Beeston, Nottingham NG9 1LQ is a risk, the insurance covers almost all these costs when flooding occurs. According to Kunreuther and Michel-Kerjan (2007), the insurance sector is playing a vital role in regards to flooding and addressing the challenges faced by both the insurers and insurers when dealing with the effects of climate change on risk management strategies (p. 3). According to The Money Advice Service (2014), there is no need to worry buying a house in a risky world since the insurance sector covers various costs due to flooding. Such costs include repairing, restoring, and drying out your households, replace or replace your damaged belongings and furniture, debris removal, professional expenses such as architects, surveyors, and solicitors, and offers an alternative accommodation if your home is damaged. The Association of British Insurers (2008) asserts that there many benefits of pricing flooding risk. The insurance sector protects individuals and business against the daily risks such flooding. The insurance sector provides a financial compensation to cater for the losses incurred due to flooding (Association of British Insurers 2008, p. 2). This compensation highly helps you recover from the losses incurred if flooding occurs. Factors to take into account in deciding whether to buy insurance cover for flood risk There are a number of factors that one needs to take into account in deciding whether to buy an insurance cover for flood risk or not. Most of the homeowners lack a choice about purchasing a flood insurance cover. It is important for one to consider some various factors before buying mortgages that fall in floodplain areas. This is because the standard home insurance cover does not compensate losses caused by flooding. The buildings in a 100-year floodplain has higher chances of flooding than those a 30-year mortgage (Association of British Insurers 2008, p. 4). Given that, most of these homes are collateral for loans; this makes sense that the home lenders must protect their investments. In case of flooding insurance cover, here are several factors one should consider when deciding whether to buy a flood insurance cover. The type of insurance, contents- when it comes the time to claim for your damaged properties, the amount the insurance company will compensate will depend on the type of insurance contents you have. To begin with, if you pay for “new for old” insurance policy, if flooding occurs and causes damage to your home, the insurance company will compensate enough finance to enable you replace all the damaged properties with equivalent new items apart from clothes where they deduct some amount due to wear and tear (Liedtke 2007, p. 12). Most of the insurance companies offer this type of policy. Secondly, if you pay for “indemnity cover” insurance policy, the insurance company will compensate you before the flooding occurs. For instance, if your sofa needs a replacement cost of £2,000, the insurance company will only compensate for the old sofa, which might only cost £200. Alternative accommodation- Another factor to consider is the amount of compensation an insurance company offers. This is because different insurance companies offer different amounts for alternative accommodation. It is recommendable that you buy an insurance policy that offer a minimum of £40,000. Buying an insurance cover that offers an amount less than this will force you to return to your home even before the completion of the repair or pay for alternative accommodation bills yourself (Chartered Insurance Institute 2008, p. 17). Every individual life in a flood risk of some sort-in general, a 100-year floodplain home will carry the greatest flood risk. However, the FEMA (Federal Emergency Management Agency), which manages the NFIP (National Insurance Program) states that an approximate 20% of its insurers come from parts which are not termed as high flood risk (Liedtke 2007, P. 7). According to Westall (2001), a large number of homeowners from low-to high risky areas do not see the necessity of buying a flood insurance cover and their buildings end up in flooding water. Westall recommends the benefits of pricing a flood insurance cover and asserts that every homeowner must consider buying a flood insurance cover. It costs less than one thinks- many homeowners fail to buy a flood insurance cover thinking this will cost them a lot. However, it is true that flood insurance premiums for coastal buildings and those in high-risk areas are more expensive. On the other hand, in low-moderate risk areas such as Nottingham may cost less with policy payments starting at a low cost of £129. The average flood insurance premium costs £650 per year, which is less costly compared to the damage and losses caused by floods. The average flood insurance claim is approximately £42,000 (Chartered Insurance Institute 2008, p. 54). Federal disaster assistance is not the correct answer- the declaration of federal disaster assistance only occurs after a flood damages your building. Compared to purchasing a flood insurance cover, federal disaster is slightly expensive. This is because federal disaster assistance comes in the form of loans whereby the homeowner is accountable to pay some loan interest. On top of your mortgage, you must pay the loan. Factors that might affect the availability and likely price of insurance against flood risk in the next three years The main factor that might affect the availability and likely price of insurance against flood risk in the future is climate change. Climate change has several effects on insurance sector (Chartered Insurance Institute 2012, p. 26). For instance, changes in climate might lead to heavy rains hence worsening the issue of flooding. This will result to increased demand of insurance covers. Due to this increased demand, the insurance companies will have an opportunity of increasing the cost of the insurance premiums. More recurrent or severe weather events can result to large and costly insurance premiums (p. 28). Property losses may increase in the flood geographical areas or affect the policymakers resulting in a difficult situation for insurers to diversify flood risks (Re 2005, p. 8). These factors might affect the availability as well as the insurance premium’s costs. Increase in property losses means that insurers will need to spend extra amount or buy more reinsurance covers to ensure that they are able to pay insurance claims hence remaining solvent (Kunreuther & Michel-Kerjan 2009, p. 3). Even in a given risk’s level, uncertain or inaccurate information can result to a complex situation whereby insurers will be unable to estimate the risk level (Environment Agency 2014, p. 14). This can as well increase the insurance cost. Following these potential pressures, different insurers will respond in different ways to the risk of flooding. For instance, they may pose higher insurance costs in areas that face higher risks of flooding. Alternatively, insurers may set higher charges to reduce their exposure to such hazards or withdraw such hazards’ covers (Kunreuther & Michel-Kerjan 2009, p. 3). In addition, this might lead to opportunity of insurers providing other insurance products and educating the communities on how to prevent property losses. Some of these changes and factors may relate to the way current insurers are dealing with climate variability (Re 2005, p. 31). Insurance companies are setting varying premium costs in geographical areas depending on the level of flood risk. It is evident that, after the occurrence of large flooding disaster, insurance companies tend to set higher premium costs. For instance, in Australia, the insurers increase their premiums’ costs following floods and cyclones (O’Neill & O’Neill 2012, p. 43). However, the current researches suggest that, there happens to be no clear link between property losses due to flooding and climate change. Conclusion In conclusion, Flooding is becoming a major risk and increasing common in many parts of the UK. It is recommendable that people living in a geographical area that face high level of flood risks must buy flood insurance covers (The Money Advice Service 2014, p. 67). Flood insurance covers provide many benefits to property owners since the insurance company will compensate for the cost of repairing the damaged property and purchasing new commodities such as furniture. However, there is a possibility that, insurance premiums’ costs will increase in future due to climate change. Climate change may also affect the availability of insurance covers. In order to address this issue, governments must come up with alternative means of reducing the risks caused by weather events such as flooding. 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