Widespread flooding hits the UK: a different approach to flood insurance
Today England has posted two severe flood warnings, meaning a danger to life, for the Somerset Levels, as well as more than 160 flood warnings and over 300 flood watches covering every other region of England. It is, therefore, topical to ask: How does the UK deal with the problem of flood insurance?
I spoke yesterday to Matt Cullen, Policy Advisor on Flood at the Association of British Insurers. One huge difference between the UK and the US is that in the UK flood is included in a standard homeowners policy, whereas it is excluded in the US. A second is that the UK has really accurate flood maps, while as we have seen of late not only are existing flood maps widely out of date in the US but there have been suggestions that the new maps, in Massachusetts for example, are not being produced using appropriate techniques.
One of the basic tenets of insurance is to spread risk over as many people as possible. In the UK there are about 20 million homes of which more than 90% carry property insurance and 70% contents insurance. Since flood is included in standard policies, the cost is shared widely. By way of comparison the Congressional Research Service in a February 2013 report stated:”Nationally, recent reports suggested that only 18% of Americans in flood zone areas have flood insurance.” Another report suggests that 40% of federally backed mortgages, required to carry flood insurance, do not do so.
The UK has estimated that around 5.2 million homes in England and Wales are at flood risk, with only 2.4 million of these as a result of seas or rivers. The majority are at risk because of “surface water, groundwater, reservoirs, sewers and other man made causes.”
Flood is not just a coastal problem for the wealthy, as some media reports like to suggest!
Just as in the US, the UK has tried to identify high risk properties and it now proposes to establish a reinsurance company, Flood Re, to handle the 1-2% of highest risk properties. Flood Re will charge premiums based upon the property’s Council Tax Band (think of it as similar to assessed value in the US). Each band will have a fixed premium, which will vary from about $330-$850 per annum. Flood Re will also receive a levy from insurance companies, funded by a fee of about $16 on every homeowners policy sold.
Excluded from Floor Re will be properties in the highest band, those valued at more than about $1.3 million, and properties built after 2009, to discourage building in flood prone areas.
This raises the question of whether the US could implement something similar to Flood Re. I have argued that one of the difficulties with the National Flood Insurance Program is that it tries to cover both small, regular losses and huge, infrequent catastrophic losses in one program. The much-cited $24 billion deficit in the NFIP is largely the result of two storms, Katrina and Sandy.
According to the NFIP, there are 5.6 million flood insurance policies in force in the US generating about $3.5 billion in premium income (about $625 per policy on average). I have read, but have not been able to find the quote directly, that the NFIP has said that it needs an additional $1.5 billion in premium income to be solvent.
I have looked at Census Bureau statistics. While there are 130 million housing units in the US, some of these are rented rooms or apartments in a larger building. There are, however, 75 million units identified as “owner occupied”. Remember that insurance is about the law of large numbers, spreading risks. A levy of $20 per owner occupied property would produce $1.5 billion. The 40% of federally owned mortgages not carrying flood insurance would also produce substantial additional revenue for NFIP.
One further number: the top 10 homeowners insurance companies in the US control over 60% of the market.
There are a lot of obstacles to following the UK course, not the least of which is the fact that insurance in the US is regulated at the State level, meaning that an insurance company wanting to write a new line of business has to get approval individually from every State.
But I hope that somebody in Congress is paying attention to what is happening in the UK. I remain firmly of the opinion that there is a solution which is affordable.
If you – or somebody you know – are considering buying or selling a home and have questions about the market and/or current home prices, feel free to contact me on 781.631.1223 or andrew@HarborsideRealty.com.
Andrew Oliver is a Realtor with Harborside Realty in Marblehead