The EU is on the verge of producing a Directive for flood management.

Katy Dowell and Caroline Jordan discuss what this means for UK insurers

Details of the proposed EU flood directive are expected after a crunch Environment Council meeting on 27 June in Luxembourg, which could dramatically change how government is required to manage flood plains, impacting hugely on the insurance sector.

The ABI estimates that 280,000 homes and 100,000 businesses are exposed to a flood risk in excess of one in 75 years' probability. The UK's annual flood budget for England and Wales currently stands at £564m. Since 1990, the insured costs have been $16bn (£8.69bn) a year on average. The most expensive year on record was 2004 with $40bn (£21,72bn) in insured losses, until 2005 came along with a figure of $83bn (£45.16bn). These are astronomical sums, which are expected to rise dramatically in the next decade.

Climate change has become a highly charged political issue. Insurers will have to keep abreast of European bureaucracy in order to make sure the Directive meets the demands of the industry.

The EU flood Directive was proposed to help member states prevent and limit flooding, but many in the UK are concerned that it could be damaging and lead to interference in the way the country's flood resources are managed.

Alan Gairns, property development manager for Royal & SunAlliance, says: "There is a concern that countries could be required to carry out compulsory flood mapping and this would take money away that should be invested in flood defences."

He says the insurance industry has built up a good partnership with the government and secured additional investment for flood defences. It has been on the agenda of insurers for many years.

New governance could bring increased costs to home insurers, who, in turn, will need to fill the financial void by charging their customers extra. This could bring further troubles to a personal lines market which research agency Defaqto believes could cease to exist if profitability continues to decline.

In its report Home insurance, changing policies for a changing world, Defaqto says: "Climatic issues potentially mean greater incidence of flooding and storm damage, with the consequent increase in claims costs. Some experts are already predicting that reinsurance may become harder to obtain, driving up risks for primary insurers with knock-on effects on profits as higher asset bases will be required to underwrite the home market."

Will home insurance become a scarce asset for homeowners living in flood risk zones? Government intervention is necessary to avoid it, but another layer of European red tape could threaten much of the good work already done.

Many insurers already have advanced flood-mapping systems in place to pinpoint high-risk properties.

But the ABI believes the government could take it a step further. "In order to avoid future damage there needs to be step change in the consideration of how planning decisions are taken, to take account of future extreme weather events," says Nick Starling, director of general insurance.

With Europe wading in on the issue, however, these changes insurers fear could be further delayed.

It is understood that UK government would prefer to manage flood risk from London rather than Brussels. Flood expert Professor David Crichton, of the Benfield Hazard Research Centre, says: "The UK, through Defra, has been arguing [for control] on the grounds of subsidiarity. This means that a central authority, namely the EU, should not be doing things that can be handled locally." But ultimately, the powerful European Union gets the final say when there is doubt about who holds the power, throwing subsidiarity out of the window.

One of the key drivers of the flood Directive is cross boundary flooding, which is not relevant to the UK, apart from Northern Ireland. But, as Crichton states: "Ireland is fairly low lying and less likely to be affected, say, than the Netherlands. Ironically, the main country that can be implicated is often Switzerland, which is not an EU member."

He adds that the Directive could also bring benefits such as raising the profile of flood hazards and the need for sustainable development and increasing risk management.

The Directive will be closely monitored by both government ministers and insurance leaders. Could this be another European law which brings further complexities to the insurance sector? It is clear that it's not about to become any simpler. IT

EU flood management
The European Commission proposes to make flood management improvements through:

  • Preliminary flood risk assessment of river basins and coastal areas, and the development of international cooperation in this field;
  • Preparation of flood risk maps where real risks of flood damage exist
  • Development of flood risk management plans for those zones, focused on prevention of damage, protection of river basins and public preparedness
  • Crucially, maintaining a flexible approach that takes into account the specificity of the different European regions concerned, but also the specific nature of the different schemes for insurance cover of natural events.
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