The cost of defence

The ABI's flood risk report Coastal Flood Risk - Thinking for Tomorrow, Acting Today paints a disturbing picture for the towns and cities all the way across the east coast of England.

The central message running through the report is that the east coast is under major threat, and action needs to be taken now, to confront the danger posed by rising sea levels. The ABI predicts that without improvement to the existing flood defences, the cost of a major coastal flood could soar and cost £16bn. On top of that, the human cost could be huge, with lives at risk, with the elderly particularly vulnerable.

In a series of scenarios, the ABI repeated data from the 1953 storm that killed many on Canvey Island, and transferred it to today's east coast. It found that 270,000 properties would be at risk, but this would increase to 404,000 with a 40cm rise in sea levels - up nearly 50%.

And, assuming current levels of flood defences in eastern England are not improved, the financial cost of a single major coastal flooding event will rise to between £7.5bn and £16bn once sea levels hit the 4cm rise.

"This is a cautious estimate," warns the report, "since it does not include the long-term economic effects of this major level of disruption, not the impact on essential public services such as hospitals, schools and emergency services."

Some 15% of fire and ambulance stations and 12% of hospitals and schools are in these flood risk areas.

The research estimates that the minimum cost of improving coastal flood management to maintain acceptable levels of risk on the east coast alone would be:

• Thames Barrier and central London - £2.4bn - £4bn

• Tidal Thames east of the barrier: £1.6bn - £2bn

• Other east coast communities from Ramsgate to Hull - £2.1bn - £2.6bn

"It is clear from our findings that more effort is needed to ensure that regional planning strategies take account of climate change risks. Current approaches, which are medium-term, at best, cannot capture these satisfactorily," says the report.

Therefore, says the report, longer term strategies are needed, looking 50 and 100 years ahead, to ensure that development and infrastructure plans are resilient and that vulnerable activities are moved over time to safer locations.

"Government investment in infrastructure and regeneration equally needs to take account of the sustainability of projects in coastal flood risk areas. Investment appraisals should incorporate realistic long-term flood risk assessments, together with the cost of flood risk."

Following on from the floods in the autumn of 2000, the insurance industry agreed a Statement of Principles on Flooding and Insurance, committing itself to providing insurance for existing customers if the government put plans in place to improve flood defences and flood management.

The ABI believes considerable progress has been made since. But changing coastal risks will lead insurers to keep these commitments under review. The continued availability of cover for flood risk as a standard part of household and business policies will inevitably come under pressure as a result of the threats posed by floods.

Insurance companies typically price property cover on the basis of average annual loss, cost of capital to cover extreme loses and administrative expenses, profit and taxes.

According to the ABI, the current loss experience for European windstorms is about £20bn for a one in 250-year event and a global property reinsurance market amount to about £30bn premiums for capital of £135bn.

"Insurers will continue to signal to government and customers where the pressures are becoming unsustainable," says the report.

But an increase in cost from east coast flooding to around £12bn for a one in 250-year event will place considerable pressure on the reinsurance market, representing around 10% of global capacity.

This will be exacerbated as more common events become more expensive and a rising proportion of these losses need to be covered by reinsurance. This will be reflected in reinsurance premiums levels and in turn will increase the premiums homeowners and businesses pay.

"If an insurer cannot obtain adequate reinsurance it is likely to limit flood cover available to its customers, and may avoid the highest risk locations," warns the report.

There is no doubt the issue of flood risk does need to be looked at further, as it has potential ramifications for all aspects of the industry

"The [ABI] report is well thought through and based on good analysis. If the government listens to the ABI then the property insurance market will continue to grow profitably and customers relations will be benign.

"If not, the industry will probably have to restrict cover other financial institutions and customer relations will be soured.

"Climate change is the most serious currently so that should be the top priority. The ABI does good work on general insurance but has been absent on the investment side, though many member companies belong to initiatives such as carbon disclosure project.

"A collective, crusading voice from the industry is important climate change and investment.

"One issue that may be worth reviewing is the question of how to deal with coastal erosion losses, currently excluded under insurance policies.

"Possibly some innovation could be tried with government or capital market co-operation. It is sometimes said that erosion is inevitable and so is uninsurable. But after all death is insurable and that is inevitable.

"Specifically on insurance issues, planning controls for development in zones at risk to climate change are weak; building codes need to be strengthened; regulations for insurance need to allow insurers to offer innovative products like weather derivative and Cat bonds.

"Insurers should be allowed to smooth catastrophe claims instead of relying on the volatile reinsurance market.

"I think the government is listening to the ABI, but not enough. Government departments have their own agendas and tend to brush off climate change as 'environment'."

Andrew Dlugolecki, advisory board, Carbon Disclosure Project, CII

"I completely agree with the ABI's position. Flooding is becoming an increasing problem - rising sea levels and more volatile weather will make this worse. Without major flood defences or mass population shift there will be serious and regular flooding in low lying areas in the coming decades.

"The insurance industry is well placed to recommend policy here as it is closest to the financial impacts of current levels of climate change, and has the capability to model the next phases.

"The insurance industry is making its voice heard again. In the past it has driven improvements in safety at work and in travel. Now it is speaking out on actions needed to safeguard our environment.

"The market dynamic of the insurance industry picking up the tab for safety-failures gives them a great perspective to speak out on areas for improvement.

"The risk of runaway flood risk is that such risks could become uninsurable, in that the market price of the risk would be unaffordable by most policyholders. In such circumstances a government needs to step in and protect against such risks. We need to pay now or pay later."

Lis Gibson, insurance partner at Deloitte

"While we all support the need for increased investment in securing coastal defences against rising sea levels, the industry needs to be seen to be taking responsibility for the role it plays in contributing to environmental damage.

"How? In part, by adopting a restoration rather than replacement policy. New for old may be a tempting offer to the policyholder, but nobody should be in the dark about the true cost of this. By using restoration services, the need for original manufacture and its inherent costs on the environment in terms of raw material sourcing, processing, energy consumption and distribution is significantly reduced.

"By leading change from within, the industry will not only be playing a part in minimising the impact of environmental damage, it will also be protecting its policyholders' investment as well protecting its profits."

Aidan Rogerson, head of sales and marketing at Munters

"There is almost unanimous agreement that climate change is already increasing the threat from natural perils. This threat will continue to grow in the coming years unless we take action to combat it. The ABI message, that action is required now, is very important if we want to maintain the risk at acceptable levels.

"The investment proposals put forward by the ABI are essential to maintain the widespread availability of flood insurance in future. If the flood risk increases, it may not be commercially viable for insurers to provide flood cover on the current basis.

"Improvements to flood defences are only addressing the symptoms of climate change. Action is needed to tackle the causes. This is a responsibility we all share, but the government needs to take the lead to achieve real and lasting benefits. Increasingly organisations are using corporate social responsibility and environmental commitment as hygiene factors for choosing business partners.

"The dialogue between the ABI and government is helping to raise the profile of climate change, and hopefully the priority the government attach to it. A key test of the government's commitment will be the level of sustained investment in flood defences and the strength of planning rules to prevent further development in flood risk areas."

Steven Ward, household manager for Allianz Cornhill Personal

"There's an increasing need to understand which properties are at risk of flooding, and to convey that information in a transparent, accessible way.

"MDA this month has signalled its interest for greater involvement in UK flood and subsidence risk mapping, on the back of its recent entry into claims and underwriting through its UK subsidiary Marshall and Swift/Boeckh (MSB).

"Preliminary studies we have undertaken in Morpeth suggest that some of the current models could have inaccuracies by as much a 1m of flood depth, due to differences in modelling of river water flow in flood conditions.

"If that is the case on a national scale, then there are potentially a lot of people who might be affected, and the cost benefit case for defences may be open to further discussion."

Tony Boobier of McDonald Dettwiler Associates (MDA)