As flood plain development continues unabated, the government is being urged to take on the risk of flood cover. Tom Flack explains
The government's refusal to stop developing housing stock on flood plains has been met with despair by the insurance industry and flooding costs insurers almost £1.5bn a year. Insurers are becoming increasingly concerned that unless government agencies begin investing in flood defences at a sustainable level some may be forced to withdraw from the market.
Research published by Lockton suggested that 80% of property professionals think government should underwrite the risk of flooding, especially when the government puts housing developments on uninsurable flood plains.
"Property underwriters have urged the government to underwrite the risk in the event that the subsequent developments prove uninsurable due to flood risk," says Richard Owen, Lockton's real estate and construction division says.
This view is not followed by insurers. An ABI spokesman told Insurance Times: "We don't think the government should be underwriting flood risk any more than the government thinks it should be doing it."
And Alan Gairns, property development manager at Royal & SunAlliance, says: "The state should step in only if the industry is failing. This is clearly not the case. If the state were to play a role, it would create a free-for-all for developers."
The intervention of the state in underwriting natural catastrophe risks is not without precedent. In the US the state of Florida provides a catastrophe fund to cover the cost of homes affected by hurricanes. State governor Charlie Crist has been subjected to vehement criticism for establishing the $14bn fund.
Edward Lazear, chairman of the White House Council of Economic Advisers, comments: "Government insurance would displace insurance provided by the private market. For the most part, the national insurance industry is healthy today."
The same could be said of the UK where benign weather has sustained insurers' results and given the Lloyd's market a boost.
If the government were to step in, insurers could end up out of pocket.
Norwich Union (NU) has also called on the government to do more to review its policies, particularly when its comes to the Planning Policy Statement 25, which provides planning policy guidelines to local authorities.
"The government should continue to review its approach," says Peter Ketteringham, NU's household underwriting manager.
Some brokers believe that it is inevitable that the government will begin underwriting flood risk.
"It is not fair to expect insurers to pick up the risk. But it is not fair on the taxpayer either," says Grant Ellis, chief executive of Broker Network. "But there should be the opportunity for the homeowner to buy insurance from some non-profit organisation – in effect, to subsidise the risk."
Pressure is mounting on the Department for Environment, Food and Rural Affairs to solve the flooding problem. With the ABI flexing its muscles over the planning issues, brokers are beginning to wade in by suggesting that the risk will have to be taken on by the taxpayer.
As one broker says: "If the government doesn't want to pick up the bill then it is going to have to start being more proactive in flood management." IT