29 Aug 2011

Property-level flood information and availability of insurance in the UK


An estimated 2.3 million homes and 185,000 businesses in England and Wales are at risk of flooding, according to widely cited figures from the Environment Agency.  There is no particular reason to doubt this estimate, and with current trends in climate change and urban development we can probably expect the number of properties at risk to grow.

When it comes to the availability of flood insurance however, the problem is how to agree not just the likelihood of flooding but also the financial severity of potential flood damage to individual properties.  Insurers know that all geographic modelling of flood risk is to some extent generalised, and that in practice many properties in areas of flood risk will have particular characteristics that make them less or more susceptible to damage.

This article explores some of the barriers homeowners and small businesses may encounter in sharing their specific flood risk information with insurers, and suggests ideas for better communicating and confirming that information.

In the current UK insurance market the primary obligation for understanding the geographic and hydrological aspects of flood risk well enough to make economic judgments on the relative insurability of properties in different locations, rests with the insurer.

Insurers make use of public and commercial models of national flood risk, and to varying degrees develop their own internal expertise and strategic position on flood issues.  Some insurers also actively engage with lead local flood authorities to access their additional mapping, and monitor the development of flood management schemes.

Progress in remote sensing technology and the availability of better addressing and elevation data provide insurers with the opportunity to better estimate flood risk at property level.  Insurers who underwrite property risks in-house, rather than through a delegated intermediary or aggregator, are usually able to ‘geolocate’ each property on a digital mapping system at the quote stage.

However it is important to understand that the modelled information on geographic flood risk available to insurers is itself rarely precise to the individual property.  Unless a detailed site survey is available for the property -- not usually the case for household risks -- the insurer will base their view of the level of flood hazard on the general vicinity rather than individual characteristics of the property.

There may therefore be additional relevant information on the flood risk at or near the individual property that the homeowner or business owners may wish to bring to the attention of insurers when seeking cover or at renewal.

This information may relate to resilience or resistance measures specific to the property, to small-scale variations in topology that reduce the risk to the particular property, or to community-led projects to reduce susceptibility to flood damage.  Individuals may also have access to information on the extents and effects of past flood events near to their properties.

Barriers

At the moment there are several barriers to the communication and use by insurers of additional flood information held by individuals:

1.  In the household and small business markets insurers often use semi-automated ‘fast-flow’ systems to underwrite insurance policies.  These markets are competitive, and profit margins are usually low, so insurers must maintain efficient processes in order to keep insurance affordable for customers.  This means insurers need to avoid where possible too much ‘bespoke’ underwriting when considering the flood risk on individual cases.

2.  The factors that insurers consider when underwriting flood risk are not always transparent to the consumer, and sometimes differ between insurers. Individuals may therefore not always know what additional information would influence an insurer when considering the risk to their property.

3.  Public understanding of flood risk is variable.  It may be higher in communities that have recently flooded or where action groups such as the National Flood Forum have raised awareness.  However many individuals will have difficulty with the language and concepts used by insurers to discuss flood risk.

4.  Some individuals, particularly in areas where there is a modelled flood risk but no recent history of flood events, will be sceptical that their properties are at risk. Given the potential costs of flood damage, insurers may be wary of the ‘moral hazard’ that arises when individuals are encouraged to provide information on the flood risk to their own properties.

5.  There is no disinterested authority at the local level that can provide individuals with a detailed and reliable assessment of all sources of flood risk to their property.  While in principle individuals can engage professional experts who will produce a flood risk assessment for their property, this will be financially onerous for many individuals.  Local flood authorities may be reluctant to publish flood mapping that could be used to identify risk to individual properties, for fear of legal liability.

To a certain extent insurers are already making attempts to overcome some of these barriers.  This was one of the key topics discussed between Government, insurers and other bodies with an interest in the financial management of flood risk during working group meetings earlier this year.

Some of the problems around obtaining local flood information may also be reduced in time as the various bodies responsible for flood management and mapping develop their capabilities and strategies for communication.

However following are some ideas that the insurance industry and/or Government could consider for action, or that individuals may wish to consider when seeking affordable cover.

Ideas

Insurers have a general obligation to treat customers fairly in their underwriting practices.  Until July 2013 members of the Association of British Insurers (ABI), which represents most of the UK’s largest insurance companies, have additionally agreed to underwrite flood risk on existing household and small business policies within a market agreement called the Statement of Principles.

Implicitly this means that insurers should make reasonable arrangements to consider additional information about flood risk brought to their attention by individuals or brokers, if it will make a material difference to their view of that risk.

Ideally insurers should clearly communicate to household customers the extent to which they are ready to consider additional flood information, and how customers can submit it for consideration.  However in practice customers may have to persist in correspondence with their insurer.

Insurers who transact business mainly via delegated authority brokers or aggregators, based on strict selection criteria, may have limited capacity to consider additional information.  However those who deal directly or through high street brokers should have in place a technical referral process to handle non-standard proposals.

The ABI has agreed a standard insurance letter that individuals can obtain from the Environment Agency to communicate information about the level of risk in the vicinity of an individual property.

Although the EA is careful to mention that this information does not provide an indicator of flood risk at an individual property or site level, in practice this letter is usually a more specific guide to that risk than the national flood data sets used for general purposes by insurers.

While the EA information does not currently cover all sources of flood risk and will not always be decisive in determining insurability, this letter is an option that individuals should consider if they think that an insurer has taken too broad a view of the flood risk at their geographic location.

Insurers should make efforts to ensure that customer are aware of this option as a possible recourse, and include within their underwriting channels a process for accepting and reviewing such letters forwarded from the EA.

These standard insurance letters were negotiated separately from the Statement of Principles, and there is no obvious reason why this useful arrangement should not continue beyond 2013.  There is however potential for equally credible commercial reports to emerge as alternatives in the market, if insurers agree to recognise them.

The wider use of flood questionnaires, or the development of a standard template for submission of flood information, has potential to clarify insurers’ requirements and simplify their consideration in the underwriting process.  Flood questionnaires are already used by the industry to a limited extent, mainly by specialised insurers or in the ‘private clients’ market.  Insurers could look to adapt this approach for incorporation in standard question sets used in e-trading platforms and other ‘fast-flow’ underwriting systems.

Current questionnaires typically gather information on proximity of the property to sources of flood risk, height of the property above normal water levels, identification of cellars or basements, experience of flooding, and whether any measures have been taken to reduce the risk.

The main issues that arise from the use of questionnaires are that individuals may struggle to understand the responses required and gather information and that insurers may not have confidence in the completeness or accuracy of the responses.  It is important that any questionnaire or information template is accompanied by clear notes explaining terminology, different sources of potential flood risk, and why the insurer is interested in each piece of information.

Insurers should consider making a distinction in the way they request and treat information from individuals with properties that have been directly affected by flooding in the past, individuals who are in areas that have been affected by flooding but want to provide evidence that their own properties are safe, and individuals with properties that are within the floodplain according to hydrological modelling but where there is no recent history of flooding.  These customer groups may have very different perceptions of flood risk, and there will be a disparity in the amount of information and support available to them in their communities.

Individuals who wish to gather full information about the potential flood risk to their properties may need to seek help from several sources.  Although the Environment Agency can provide an indication of where a property sits in relation to the fluvial and coastal flood plains, additional information on other sources of flood risk that may influence the view of insurers -- such as drainage infrastructure, susceptibility to surface run-off during heavy rain, and local development plans -- may be held only by local bodies.

Individuals can obtain a limited amount of environmental information on their properties as an optional enquiry added to a Local Land Charge Search (CON 29O). This mechanism, and related Land Data and the National Land Information Service functions, could be extended to make available both any information on property-level flood risk held by the local planning authority and any relevant information on drainage held by the water utility companies responsible for the area.

Commercial environmental search reports, which draw on the above sources but also provide a range of ‘added value’ information on flood risk and other geographic hazards, are now a common tool in the housing market.  At the moment however these reports are sufficient only to raise a flag on potential flood risk to the individual property; they may satisfy a mortgage provider but not necessarily the more robust requirements of an insurer.

We should also bear in mind that many insurers re-evaluate a customer’s flood risk annually.  The optimum model may therefore be something more like the current energy performance certificate, which would describe the level of flood risk at each property (within an area of known concern) and could be updated whenever there is a material change to local flood maps.

Some local authorities are currently developing their own mapping and data on surface run-off in accordance with their new responsibilities under the Flood and Water Management Act 2010.  In most cases these local authorities have engaged civil engineering consultancies to carry out the work.  In England and Wales Preliminary Flood Risk Assessments produced by lead local flood authorities were passed to the Environment Agency in June and we may expect publication of a high-level national picture towards the end of the year.  However the development of surface water modelling remains substantially behind that of fluvial and coastal flood modelling.

Although high-level outputs will be published, local authorities are often reluctant to release their information on flood risk in sufficient detail to enable individuals to judge the risk to their properties, even when the modelling is arguably granular enough to support that level of detail.  The main concern is that local authorities may be faced with claims for financial liability if their indicative mapping leads to housing “blight” or is not updated quickly enough when the flood risk improves.

There is so far little case law to support this concern.  However Government should consider an enhancement to the regulatory framework that will protect local authorities from liability, provided they make best endeavours to communicate flood risk in their areas fairly and explain the subjectivities involved, and should also encourage civil engineering companies and water utilities involved in flood management and mapping to make their full data available.  This would support the ability of individuals to understand the potential risk to their properties and highlight the additional relevant information to their insurers.

Insurers should also encourage individuals to provide specifics of any flood resilience measures they have taken to protect their properties, with particular reference to products and installers. At the moment the lack of recognised standards for flood resilience products makes it difficult for insurers to give this type of information its due weight without further on-site investigation, but confidence in this information will grow as the adaptation industry matures and ‘kite-mark’ schemes appear.