November 28, 2012 / 8:26 AM / 5 years ago

TEXT-Fitch:Risk pool is likely solution for UK flood insurance

Nov 28 - The most likely solution to providing insurance coverage in high-flood risk-areas of the UK is the introduction of a non-profit risk pool, despite the government’s recent refusal to provide a temporary overdraft facility to the industry’s latest proposal, Fitch Ratings says. But the challenges of designing and funding a special insurance pool that also covers the burdensome administrative costs leaves the availability of flood insurance highly uncertain.

The expiry in June 2013 of the government and insurance industry’s Statement of Principles (SoP) agreement to provide insurance in high flood-risk areas, while positive for the UK insurance industry, leaves households at risk. Removing existing market distortions would improve the credit profiles of UK insurers as it would allow them to price flood-risk appropriately. However, affordable cover is not likely to be available without some form of government initiative.

A pooling of risks, which may include a government subsidy, would ensure the availability and affordability of insurance for the minority of households whose properties are located in high-flood-risk areas. Many other countries have taken this approach to catastrophe risk.

The increase in property values and the propensity to build in flood plains have increased risks for insurers. Higher flood-related losses incurred from the numerous flooding incidences in June, July and last weekend will contribute to a deterioration of underwriting margins for UK non-life insurers for their full-year 2012 results.

In the SoP, the UK insurers agreed to provide flood insurance to standard households and small businesses in areas of significant flood risk in return for the government taking action to reduce this risk to below a 1- in-75 chance of flooding within five years from July 2008. Frustrated by the slow pace of these improvements, the Association of British Insurers (ABI) has made it clear that agreement would not be renewed.

The ABI said on 25 November that the government will not provide a temporary overdraft facility to the proposed not-for-profit special flood insurance fund. The proposal aims to provide affordable cover for 200,000 UK households in high-flood-risk areas, with an overdraft facility covering claims if there were 2007-style floods in the early years of the scheme.

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