Insurance Times assembled a panel of experts in a public debate on how the industry should respond to the independent review of the response to last summer’s flooding. Lauren MacGillivray reports.

The £800m the government has promised by 2010-11 to pay for defences against flood and coastal erosion is just not good enough. This was the conclusion reached by a diverse panel during the flooding Question Time held by Insurance Times, on the day the Pitt Review’s response to last summer’s floods was published, 25 June.

MPs and representatives from the ABI, the Environment Agency and the emergency services voiced their opinions on Sir Michael Pitt’s recommendations. And, considering the ABI’s past clashes over flood management with panel member and former Home Secretary David Blunkett, the debate was surprisingly friendly with common ground reached on most fronts.

Has the government committed enough funding to flood defences?

Flood management is obviously a costly endeavour and there has been an ongoing debate over accountability for spending. The government’s current level of spending is £650m, which will rise to £700m in 2009-10 and £800m by 2010-11. Pitt was supportive of the £800m commitment, but said that due to evidence of the growing risk of climate change, the government should plan funding based on above inflation rate settlements in future spending reviews.

Alongside the Pitt Review, the Department for Environment Food and Rural Affairs (Defra) announced that at‘ least £5m of the government’s three-year budget up to 2010-11 would be used for the development of surface water management plans, and at least £1m would be used for maps to improve reservoir safety.

But panel members were concerned about funding beyond 2010.

Blunkett wanted the spending review following 2010 to include a broader review of how to deal with climate change.

He said: “One of the issues that strikes me is that, in my city [Sheffield], there was an enormous breakdown in drainage and the banks of the river were bursting. But there was the impact of climate change up on the moors, which no longer have the sponge that used to exist with the peat moss to holds that level of water. So we need to address not only how to deal with flood plain and construction issues, but also how to address the long-term issue of substantial change in the environment of our country.”

Mark Taylor, general manager of HomeServe, added: “The main question that really isn’t addressed is who pays? That’s one of the biggest concerns for the insurance industry. There are a lot of recommendations and significant millions of monies talked about to develop and deliver these recommendations. But it doesn’t really pinpoint who should be paying for it.”

Meanwhile, David King, director of water management for the Environment Agency, warned that the annualised damage from floods could grow from £1.5bn to £25bn by 2050.

“We lag behind in our understanding of risk from surface water and in our planning of how to manage it.

David King, Environment Agency

He said: “If we’re going to manage that risk down and keep it at that level, then we’re going to need the collective efforts of the insurance industry, government, Environment Agency, local authorities and others, underpinned by the appropriate level of investment.”

Nick Starling, the ABI’s director of general insurance and health, agreed that more funding was needed. But he said: “We’re trying to move away from a ‘spend this, spend that’ discussion. We know there are about 500,000 houses at high risk in this country, so we’re trying to sit down and ask where are these properties, what are the risks associated with them, what is a long-term plan to deal with those risks, and what do we do with those that can’t be covered?”

Does the UK have adequate drainage facilities?

Drainage continued to be a hot topic throughout the panel’s discussions. Historically, the government’s focus has been on coastal erosion and river floods. But surface water caused by poor drainage, and lack of accountability for drainage, was responsible for much of the damage in last summer’s floods.

King said: “One of the characteristics of last summer, which was very much a surface water event, was inadequate drainage for the amount of rain that fell. If we have a reasonable understanding of flooding from coast and river systems, then we significantly lag behind in our understanding of risk from surface water and in our planning of how to manage it and in the investment that’s needed.”

Commenting on the Pitt Review, he added: “The £650m that’s currently spent and rising to £800m is largely directed at building and maintaining defences on rivers or from the coast. So it has addressed the issues of the 500,000 high-risk homes or 24,000 kilometres of defences we have.

“But it doesn’t in any way address the issue of surface water. You can have all the plans and accountability you like, but someone is going to have to put in capital to address the issue. This will come from a variety of sources, including local authorities and water companies, which will look to recover the cost from consumers.”

How can the public be better educated about flood risk?

The Pitt Review calls for insurers to work with government to deliver a public education programme setting out the benefits of insurance in the context of flooding. Pitt also recommends that in flood risk areas, insurance notices should include information on flood risk and the steps that can be taken to mitigate risk.

Taylor believed an opportunity was missed last year in educating policyholders. He said: “The focus was on getting them dry and back in their properties the way they were before. One of the things we need to do in this evolving market is to educate policyholders on some fairly basic things they can do – at a cost, but maybe a discounted cost to reduce the risk of flooding to their homes.”

“I was a bit unfair, but it was for the very good cause of getting my constituents sorted out.

David Blunkett, former Home Secretary

But Starling said the ABI had already been working on educating consumers, having produced guidance shortly after the floods on what policyholders could expect from their insurers.

Blunkett saw education programmes as a shared responsibility. He said: “The education and advice campaign should be a joint effort between all of us. We’ve all got an obligation and I think the insurance industry could help enormously here in terms of getting across the importance of full insurance.

“This time last year only 14% of businesses had full insurance and many of my constituents didn’t have any at all, and were bailed out by the £1.5m that the local community in South Yorkshire raised, which was fantastic but will never happen again. We need to think ahead.”

What went wrong in the response to the 2007 floods, and who was to blame?

Pitt’s report revealed that 22% of people affected by the floods were dissatisfied with their insurers. But he said the majority of insurers had done a good job.

At the time the Pitt Review was published, the ABI said there were still 2,000 households that were uninhabitable due to last summer’s floods. But instead of blaming insurers for this, Pitt pointed the finger at construction materials and methods. He called for changes to building construction regulations for new homes, and homes being refurbished.

The flooding Question Time panel was also easy on insurers – including Blunkett, who had been one of the insurance industry’s biggest critics over flood management.

Blunkett said: “I was a bit unfair, but it was for the very good cause of getting my constituents sorted out, so it was on the right side. I do think there were enormous lessons learned quite quickly and it was in those early weeks when there was aggravation, including from insurers dealing with their own loss adjusters and the difficult issue of the right contractors. A lot of the aggravation was a combination, not simply insurers.”

Starling added: “We need to remind ourselves all the time just what a massive event the flooding was last summer. The biggest previous natural event in insurance costs was the hurricane of 1987, which in today’s money cost about £2bn. This was about £3bn, there were two major events back to back, and it’s worth remembering what a huge challenge that was for the insurance industry – loss adjusters, brokers, everyone dealing with claims. And by and large, it was dealt with efficiency and imagination.”

Starling said the reason some people were still out of their homes was that some properties still hadn’t dried out. But he added that some people did not know their homes had been flooded until several months after the event because the water did not rise above the basement.

“I do not think it was in the interest of any of our members to spin out the length of time it takes to get a house back together, because of the huge costs involved.

Nick Starling, ABI

Given last summer’s events, should we still be considering new properties in flood risk areas?

There was broad acceptance that new homes should not be built on flood plains, although it was also agreed that this sometimes could not be avoided.

As Blunkett said: “Anyone who thinks in the insurance industry or elsewhere that we can simply stop building anywhere that has any risk is living in cloud cuckoo land.”

Starling said obviously new builds in high risk areas should be especially avoided. But he said if it were necessary to build in such areas, then creative solutions should be implemented, such as building a home that enables water to flow through it.

King said whenever homes in flood risk areas were rebuilt, they should be built for resilience.

But Starling warned: “You have to pay for resilience reinstatement yourself. That’s what happens with insurance, you get like-for-like. There are some things you can do which don’t cost any extra, like putting your plugs halfway up the wall, but other things you’d have to pay for. We know there’s quite a lot of customer push-back on this. A lot of people from last year’s floods simply want their homes to look as theyt did before. There’s a very strong human desire for that.”

How can new technology help protect buildings from flooding?

The other main point for insurers made by the Pitt Review was the recommendation they should help fund new research into technology to dry out homes faster.

One member of the audience accused insurers of ignoring such technology.

Taylor, while watching his words, also urged insurers to consider such technology. He said: “The traditional method of drying buildings comes at a price that insurers are used to. The advantage, particularly in commercial situations where there’s business interruption, is that in theory it will reduce business interruption and reduce the cost for alternative accommodation.

“One of the things we need to do is to educate policyholders on some fairly basic things.

Mark Taylor, HomeServe

“It’s really something insurers need to take a good strong look here. It’s really about understanding the technology and the advantages that it brings.”

But Starling said: “I don’t think it was in the interest of any of our members to spin out the length of time it takes to get a house back together, because of the huge costs involved in that. And I imagine all of them will be looking quite hard at technologies.”

He added that ABI members preferred it when a home was too dry as opposed to not dry enough before their work was done.

What remains to be seen is what will happen with the ABI’s statement of principles, which state that insurers will continue to provide cover for homes with a risk of flooding that is greater than one in 75 only where flood defences are planned.

The ABI hoped to conclude its negotiations with government over the statement of principles this month.

Starling believed the agreement has distorted the market.

“If it hadn’t been there I think we might have seen much more of a drive towards innovative planning and design,” he said. “Instead, what’s happened is that the planners have put up housing probably knowing insurance would cover them in the future.”

Going forward, the ABI was looking for a better understanding of how exposed the 500,000 properties in high-risk areas are, and what the government plans to do about them.

He said: “The catchphrase is that we don’t want to end up with houses uninsurable, unsaleable and uninhabitable. Let’s say it starts raining tomorrow and we have another £1bn, £2bn, £3bn flood. Then this would become a more pressing issue.”