Insurance Companies in the UK - Essay Example

Insurance companies in UK today are caught in a vicious cycle, rapid environmental and climactic changes are resulting in more frequent floods, and this, combined with poor flood management and protection by the government and the unchecked growth of housing developments, is resulting in higher and higher insurance coverage costs. Climactic changes during the past few decades or so have increased the risk of flooding, immensely. Increased rainfall has resulted in increased peak river flows, a rise in sea level has led to greater tidal surges during storms and last but not the least the soil has become more wetter on the average, especially during wintersError: Reference source not found1. These climactic changes have been coupled with massive environmental factors like rapid industrialization which has turned the natural hazards "from dangers into risks". The pollution caused by the industries is leading to a permanent change in the global climate, resulting in an unnaturally high rate of floods. Similarly, other environmental factors form a chain reaction which all inevitably lead to an increase in natural hazards like floods, storms etc. The flood insurance in UK is covered by the private sector. The Government provides flood protection and management and the damages caused by the floods are covered by the private insurance companies. This "can be described as a "Gentlemen's Agreement" between the Government and the insurance industry". This system has been in place for more than half a century but increased flooding and subsequent costs to the insurance industry are now revealing the drawbacks of this system. One reason for the increasing insurance costs is that the flood relief and management system that is place in the Government today is highly complex and ambiguous. "The Department for Environment, Food and Rural Affairs (DEFRA) is responsible for the overall policy The Environmental Agency (EA) has the responsibility of managing to all matters related to flood defence Furthermore, the Department of Transport, Local Governments and the Regions as well as the Internal Drainage Boards hold competences in flood protection". This system is very intricate with no clear cut delegation of responsibilities; most of these departments allocate their responsibilities to local and regional authorities thus creating disorder and disharmony. The resource allocation system is also not clearly defined with the resource allocation system and the flood defence system competing with each otherError: Reference source not found.2 Another factor that leads to enormous costs to the insurance industry is the irresponsible attitude of the house developers. "Government figures show that in 2005,9% of new homes were built in flood risk areas. Environment Agency statistics show that between 2003 and 2006, 707 developments were approved by local councils against its adviceError: Reference source not found."3 "There are more than 2 million homes at risk from coastal or inland flooding (10 % of total homes in the UK), and around 400,000 homes at very high risk of flooding (greater than 1.3 % annual probability or 1-in-75 chance).Error: Reference source not found"4 This problem is magnified several times by the behavior of the home owner's themselves. "The general public awareness of natural hazard is lowError: Reference source not found."5"Only those property owners that are aware of their being exposed to floods frequently and with severe consequences may consider to purchase insurance. An insurance population based in these assumptions makes natural hazards a bad risk for insurance.Error: Reference source not found"6. Besides general unawareness of the home owner's, the high costs to the insurance industry themselves contribute to people not having any insurance cover. The higher the risk of flood, the higher is the insurance premium; due to this many people are not able to afford having an adequate insurance cover. "In 2006, 52% of people who were affected by floods found that they weren't coveredError: Reference source not found". 7 One other aspect which comes to light is the fear of "moral hazard" on part of the home owner. Due to the severe losses and damages suffered during a flood or due to any other ill-intention the home owner might be tempted to scam/exploit the insurance company by filing false claimsError: Reference source not found.8 All of these factors combine to enormous costs to the insurance industry. According to the latest data released by Association of British Insurers (ABI); " New figures on the cost of the June and July floods, and the number of claims received break[s] down as follows: Total cost: in excess of3bn Total number of claims: around 130,000 Total domestic claims: around 100,000 (45,000 major, 55,000 minor) Total commercial claims: around 20,000 (15,000 major, 5,000 minor) Total motor claims: around 10,000 By the end of August, around 20% of domestic claims and 10% of business claims were settled . As of 2 October, the ABI estimate those figures have risen to 25% and 15% respectively. Almost all motor claims were settled within a few weeksError: Reference source not found.9" Flood settlement claims incur great costs and since floods are of recurring natures, a claim once settled can arise again within a short span of timeError: Reference source not found.10 Due to these dismal circumstances, the insurance companies are "struggling to cope". As "The Association of British Insurers Director General, Stephen Haddrill explains, "Insurers are working as hard as possible to reach customers and to visit properties early. But these events are so widespread that insurers are redeploying staff to affected areas, increasing staffing levels in call centers and undertaking visits to community centers. However, even emergency procedures cannot deliver our normal standards of service. We are doing all we can to help families, elderly customers and those with health difficulties first. We hope that other people can bear with us as we work through the backlog. We will reach everyone as soon as we canError: Reference source not found.""11 The situation looks grim for the insurance industry, with the threat of floods ever-increasing coupled with an inadequate flood defence system offered by the Government, it would not be incorrect to say that "The risk of flood within the UK is now virtually uninsurable". To make floods a risk which the insurance companies are willing to cover, a complete change in attitude and approach is necessary. The Government needs to rethink its flood management system and shape it up into a system that is both efficient and effective. It needs to "establish more stringent regulations and invest considerably more resources into flood protection". Besides improvement in the traditional methods of flood protection like embankments and dikes etc Error: Reference source not found12 modern methods need to be employed in order to reduce the damage caused by floods. A structural approach to flood management is no longer viable as a non-structural approach is becoming more and more popular all over the world. Using the "prevention is better than cure" approach, a "Flood Forecasting and Warning System" needs to be put in place in the areas at high risk of floods. In this regard, a new methodology has been developed "by integrating Danish Hydrodynamic Model MIKE 11 and GIS. The MIKE 11 flood forecasting system comprising of three modules of NAM, HD and FF. FF module is used for flood foresting. The Geographic Information System (GIS) in this has proven to be a very effective tool for describing, analyzing, modeling and integrating forecasted flood levels with other related information such as topographic, thematic and attribute information. It offers new opportunities to develop and implement a user-friendly, interactive decision support system for flood forecasting and identifying the affected areas using dynamic spatial modeling. The study concludes that an effective Warning System that can release warning in advance, i.e. 72hrs, 48hrs and 24hrs. It can change the existing scenario substantially and render informed decision making in adopting proper measures towards disaster preparedness, mitigation, control, planning and management. This kind of advance warning can help the authorities for better flood preparedness and also effective flood mitigationError: Reference source not found".13 Besides improving the methods of flood control, the Government needs to reorganize the whole structure of the flood defence organization. Responsibilities of each and every department need to be clearly defined and emphasized so that there is no ambiguity or confusion. The funding needs to be increased as wellError: Reference source not found14. Housing scheme developers need to start taking more responsibility as well. As the Labour MP Alan Simpson suggested that developers should "pay for insurance for up to 20 years after they build on flood plains". This suggestion, if accepted, will ensure that the developers would "think twice" before building on high flood risk plainsError: Reference source not found.15 One another suggestion is that the Government should "collect contributions from the developers" and levy "charges from developers where builders should be charged 1 percent of the value of each new property". This measure will have a two-fold effect - Firstly, the developers will carefully consider every factor before building on a flood risk site and secondly the Government will have extra revenue to improve upon their flood defence structureError: Reference source not found.16 The reforms and structural changes that need to be implemented and/or being implemented in order for the insurance industry to continue providing insurance cover for the risk of floods are aptly summarized in the Association of British Insurers (ABI) "Statement of Principles on the provision of Flooding Insurance". The ABI will provide a minimum cover of 1 in 75 years as defined by the Department of Environment, Food and Rural Affairs (DEFRA) and the higher the risk, the higher will be the premium paid on that property. The ABI will provide minimum coverage to those high risk areas where an improvement in the flood defence system is planned by the year 2007. On the other hand, high risk areas where no improvement is planned will be decided in a subjective manner depending on the situation on hand. The ABI has also set down certain preconditions for the Government, in order to continue providing insurance cover to the flood affected people. These conditions include: 1. An increase in the Flood Defence Budget 2. Improvement in the Flood Defence System 3. Full implementation of PPG25 (Planning Policy Guidance on Development Planning and Flood Risk), with full reporting of the level of compliance by local authorities and consideration of administrative processes in the planned review of PPG25 in 2004. 4. Full Access to the Environment Agency's Flood Asset Database 5. Development of a better Flood Warning System 6. Consideration given to an "integrated drainage management for England and Wales, similar to that in operation in Scotland". 7. Improvement of the Sewerage System in order to Eliminate FloodingError: Reference source not found.17 All of the abovementioned reforms need to be seriously considered and implemented by the Government, in order to provide the insurance industry with some incentive to continue providing flood insurance and to change the risk of flood from "uninsurable" to "insurable". Bibliography Error: Reference source not found Read More