UK Insurers Can No Longer Insure Flood Risks - Essay Example

Running Header: UK Insurers Can No Longer Insure Flood Risks Student’s Name: Instructor’s Name: Course Code: Date of Submission: Introduction Insurance is a type of risk management used to protect against the risk of uncertain loss. Insurance is usually the equitable transfer of loss risk from one entity to another. Insurance trade risk management with the insurer by exchanging paid premiums. It is recommendable to have a good policy for the home. Insurances are meant to reduce the risks. It is crucial for homeowners to have home insurance in order to protect against loss of personal property and loss of home use. Colin, Edward & Edmund, (2007) argues that severe flooding in UK is becoming a threat to the homeowners and properties with hopes of being insured diminishing. Consequently, the flood related risk has increased significantly making UK insurers decline to accept such policy. This is likely to force home and business owners to take care of their own business. This is because of increased cost that is being experienced by insurance firms. Insurers are threatening to cease providing cover to business and homes in areas prone to flooding. This is until new anti-flood measures or strategies are put in place by UK government. According to Association of British Insurers (ABI), approximately 517,000 homes across the UK are at “significant risk” as illustrated by Environment Agency. This is likely to make them become uninsurable in the future according to Andrew (2011). In summer of 2007, several regions of the country were destroyed by three separate flood disasters. This forced insurance companies to pay over £3billion as claims. This has put a lot of pressure on what they will do in the future if such major flood incidences continue. This is the reasons why the UK insurance firms are likely to no longer insurer business and homes affected by increasing floods in the regions. People living near rivers and coast are likely to lose 40percent of their homes’ value because of the flood risk becoming uninsurable. According to Environment Agency, almost a million homes and 300,000 businesses are at a high risk of floods mainly in areas like London, Hull, Blackpool, Manchester, Liverpool, and Middlesbrough. Insuring some homes in extremely risk areas has become difficult for the insurers. If one becomes lucky to get an insurance premium, then he is likely to pay even up to 60percent more for the premium. According to Adam (2010), flood claims have increased significantly by over 200percent since 2000. Currently, around 500,000 homes are facing significant flood risk with the figure expected to rise up to 840,000 by 2035. Insurance firms in UK have paid over £4.5billion since year 2000. This is a clear indication of expected increase in the cost of insuring such unexpected flood risk. This is making the insurance firms review insuring homes in regions prone to floods. This is likely to have an effect in the future as insurance firms become reluctant in insuring homes in flood risk areas. A decision by UK government to cut its spending on flood defences by 27percent has significantly contributed towards forcing the insurers stop providing cover to homes in flood prone areas as illustrated by Lee (2010). This is because lack of proper control measures by the government means increased risk of flood hence higher cost in trying to cover the affected. This has forced the insurers to increase their premiums by 500percent in order to be able to cater for the future claims by the affected. According to National Flood Forum (NFF), some homes and businesses have their cover excluded from policy during renewal (Lee 2010). However, in areas where government has provided adequate flood defences, insurance industry has agreed to provide insurance to such homes. However, government has to maintain spending on the same without reducing or withdrawing from the funding. Government has to step up its efforts in investing in flood defences failure to which the insurers might withdraw their cover for some households. Britain’s second largest insurer has talked with the government on the need to increase further funding on safeguarding the UK against the floods. In case the government does not insure, then this is likely to make thousands of business and homeowners to be at a high risk of not getting insurance according to Colin, Edward & Edmund, (2007). In 2009 according to Andrew (2011), UK insurers paid £342million for flood and storm claims. This amount is likely to increase in the near future as more regions other than those by riverbanks, estuaries or on coast become affected as well. According to AA insurance, flooding is becoming a menace even with those areas where there have been no traces of flooding in the past. Many homes continue being built on the flood prone plains. Definitely, this increases the amount of homes and business insured and those at a risk of becoming flooded. This results to high amount of money being paid out as claims by insurers in case flooding occurs or takes place in areas. Association of British insurers has pressured the UK government to act appropriately through coordinated approach in trying to reduce the effects of flood with rise of housing. Proper planning according to the government is crucial in minimizing the damage due to increased wave of floods according to ABI. According to the ABI’s director general insurance and health Nick Starling, future planning is crucial towards minimizing the damages because of increasing flood risks (Gareth 2005). According to Nick, well-prepared measures and plans are likely to reduce cost for insurers and ensuring insurance firms do not get out of business. According to National Flood Risk Assessment statistics, there are more than 5million homes now at a risk of flooding from seas, surface water from overflowing drains, and rivers. This is twice the previous levels with more people realizing that their homes are considered to be at risk. This is because of surface water that causes 63percent of flooding in Wales and England. This means that even homes that are not near a river or sea are at a high risk of floods (Kunreuther 2007). This has made Association of British insurance to sign a contract with the government on that it must put in place effective preventative measures to reduce the effects of the flood. The association has promised to continue with flood insurance but up to June 2013 as long as there is proper management of flood risk by the government. There is likelihood of the association not renewing the insurance cover to those homes in the regions at a risk of floods. According to Local Government Association (LGA) leaders, they fear that the insurance firms might lose confidence with the government’s future investment in the flood reduction schemes. This may lead to these insurance firms refusing to give affordable insurance to the people at flood risk areas. The statement of Principles between the government and Association of British Insurers entrusts insurance firms to continue providing flood insurance but under specific conditions. Local Government’s Authority Chairman Gary Porter, there is looming danger in case enough resources are not put in place in managing the millions of homes and businesses facing the flood risks. According to Gary, failure by the government to reduce the flood risk effects might make people to look after their own properties as insurance companies withdraw their cover for such risks in UK flood prone regions. According to Local government authority, one in every six properties in Wales and England is at a risk of flooding. This might lead to huge financial costs for business and homeowners if government and insurers will not develop workable strategies. Therefore, insuring homes in regions that are flood prone is more depending on how the government is responding to the agreements it has made with the insurance firms. According to insurance industry, climate change and rising sea levels are increasing the likelihood of floods. These factors are likely to increase significantly the effects of floods making more areas and homes becoming prone to floods. Climate change is likely to increase the intensity and frequency of the floods. This is likely to become more expensive for the insurers as claims for compensation increases. In Essex coastal areas, about 20,000 families have lost equity and they are struggling with increasing premiums. Essex County Council has requested 20million Euros to build walls by the sea as a way of protecting over 35 homes at Great Wavering. The Environment Agency has completed 160 flood schemes that have defended about 160,000 properties since 2007 (Andrew, 2011). According to Environment chief executive Dr Paul Leinster, the agency will continue to reduce the risk of floods by investing in various defence schemes. However, he is informing people to become prepared by signing up to the flood warning service of the Environment agency as well as building damaged properties. Businesses, homes, and central government are likely to be left to pick up their bill for repairing the damages being caused by floods in the future. In the recent past, homeowners, local authorities, and businesses in UK have started using Floodstop. This was developed to replace the sandbagging methods. This is because it is effective, faster in terms of deployment and less costly. This is an effort to reassure the insurance firms on the improved flood risk protection as argued by Jonathan (2005). However, this is not an assuring way of reducing the effects of floods. This is because of increasing unpredictability of floods. However, it is a crucial step towards reducing the effects of floods. However, there is much to be done in order to restore the insurance firm’s confidence failure to which the affected will have to look for their own ways of reducing flood risks effects. Insurance firms have made it clear that lack of strategies and effective preventative measures against the floods is likely to increase their chances of denying people affected insurance cover. Several Britain banks are breaking the agreement they had with the government in providing insurance for homes at a risk of flood. Most of the Britain’s largest banks are declining to renew flood insurance putting millions of properties at a risk. This has gone to an extent of making home values at flood risk areas decrease making it difficult for the owners to sell them at a reduced price. According to Chair of the Know Your Flood Risk (KYFR) James Sherwood-Rogers, there is a lot that need to be done in protecting people and properties against the floods. This has made many home owners become vulnerable to flooding to an extent of being unable to get flood insurance. This is likely to go on in future as banks try to evade paying high costs in form of premiums to the affected homeowners (Great Britain: Parliament: House of Commons: Environment, Food and Rural Affairs Committee, 2004). Lack of full commitment by the government is another major factor contributing towards insurance firms failing to insure those at a high risk. The government will cut flood defences by 27percent to £259m in 2011-2012. 630schemes were set to be in line for funding in 2011-2012 alone, however, only 356 out of 1500 projects are set to receive capital funding by 2015 as illustrated by Andrew, (2011). Such drastic cuts are a major setback in reaching an agreement between the Association of British Insurers and government in assisting and protecting homeowners after 2013. Currently, only owner-occupiers who are suffering as the banks are refusing to offer flood insurance. Buy-to-let investors cover their property against the flood using commercial insurance cover. This has left owner-occupiers suffering the devastation to their homes and belonging as well as disturbance to their lives as a result of havoc by the floods. They are also left with a big task of repair bill. The average cost of repairing a home damaged by the floods is £20000-£30000 which is unaffordable by many people making their future miserable. This means that homeowners are at risk of being left without government or insurance protection as illustrated by Great Britain: Parliament: House of Commons: Environment, Food and Rural Affairs Committee (2004). Conclusion In conclusion, UK insurers will not insure risk of flood in UK. This will force the business and homeowners to look out for themselves in future. This is because of varies factors including failure by the government to honor the principle of Agreement with the insurers. Unpredictability of flood occurrence and its effects is also contributing greatly towards the failure of insurance to insure flood risk. There are very high chances of business and homeowners looking for their properties on their own as insurance firms are finding it difficult to insure them. The increased rise of home building in areas mostly affected by the floods is also contributing greatly the reason behind insurance failing to insure home and business owners. There is need for the government to increase its commitment towards preventing the occurrence of floods. This is through laying down strategies and flood management measures that will assist in improving the flood occurrence or reduce flood effects in a great extent. Despite that, there is high possibility of insurers ceasing to continue insuring the affected homes and businesses. Unpredictability of weather and climatic changes has led to rise of sea level contributing to severe flooding resulting to loss of properties worth billions of money. This is making insurance firms stop insuring homes and business around the areas that are at a high risk as a way of reducing their spending on such losses as argued by Gareth (2005). Insurers have threatened to cease giving cover to homes in flood prone areas unless new anti-flood measures are put in place. Government should increase its funding other than reducing it in ensuring insurers continues to insure homes. However, this should involve even other organization including water companies, government and customers or society in sharing the risk of floods and preventing its risk. Failure by the involved to work together will result to insurance firms carrying the whole load, which they are likely to reject through failing to insure the affected homes. This will force home and business owners to look for their own properties. References Adam, B 2010, Flood insurance to be cancelled in the UK, viewed 23 March 2003, http://www.riskheads.org/flood-insurance-cancelled-uk/ Andrew, M 2011, Firms warn of effect of government spending cuts on planned defences, UK, Harvard University Press. Colin, R., Edward, P. & Edmund, C 2007, Future flooding and coastal erosion risks, Thomas Telford Publishing Ltd, London. Gareth, W 2005, Flood Risk Assessment, Short Run Press, London. Great Britain: Parliament: House of Commons: Environment, Food and Rural Affairs Committee 2004, Climate change, Water Security and Flooding, Sixteenth Report of Session 2003- 2004, The Stationery Office Limited, London. Jonathan, R 2005, Managing Business Risk, A practical guide to protecting your business, Kogan Page Limited, New York. Kunreuther, H 2007, Mitigating disaster losses through insurance, Journal of Risk and Uncertainty, vol. 3, no.7, pp. 68. Lee, B 2010, Homes at greatest risk of flood may lose cover, viewed 23 March 2011, http://www.thisismoney.co.uk/insurance/household/article.html?in_article_id=519282&i n_page_id=34 Read More