Flooding: Raising the barriers

Flooding is not a new phenomenon in the UK by any stretch of the imagination; for many, the worst flood to hit these isles was in 1953, when the North Sea killed 307 in the UK, 1,835 in the Netherlands and 28 in Belgium. Many also died at sea, and the floods were a primary cause for the building of the Thames Barrier.

In 1947, a peak of 61.7 billion litres of water flowed down the Thames daily, causing what was then valued at £12m of damage. The 2007 floods in Berkshire, Northern Ireland, Gloucestershire, Oxfordshire, South Wales, Worcestershire and Yorkshire cost the insurance industry £3bn, with the floods in Cumbria last year costing £200m. All the evidence suggests that, whatever your views on climate change, you cannot ignore this prevailing risk.

Arguably, the risk is worsening. One broker regaled PB with tales of insurers pulling out of covering local Spanish events because of unpredictable weather, causing their cancellations; another talks of his own [two] homes in France being flooded and of 25 deaths in the C√¥te D'Azur this year. Welcome, then, to a pattern of events that will become more familiar, far less startling, as spelled out in our climate science feature this month on pp. 6-12. The government's Foresight Future Flooding report, released in April 2004 by the Department of Trade and Industry, predicted that the number of people in danger from flooding and the costs of damage from flooding would rise significantly over the decades, increasing damage cover by at least £1bn above the £1.4bn projected annual spend by 2080.

Robert Muir-Wood, managing director at global risk modelling group RMS expects more flood risk and intense rainfall. He is careful, though, to note also that there have been large floods across the centuries and that not all developments can be pinpointed as resulting from climate change.

Principles
Insurers need to be careful that whole postcodes are not pigeonholed as all being in the same flood risk areas. Paul Beck, director of broking at Epsom-based broker Stonebridge Corporate, comments: "Although all insurers have modelling offices, there are different qualities of modelling. Some are quite primitive. We were trying to get a quote for a business on the third floor of a building by the Thames but were given a no quote because of a flood risk."

The Association of British Insurers' Statement of Principles requires that flood insurance be given for standard household and small business policies relating to properties built before 1 January 2009 until 30 June 2013 where the flood risk is not significant (defined as no worse than a 1 in 75 annual probability of flooding).

The ABI is concerned about some areas of the country becoming impossible to insure and that some developers are ignoring planning advice from the Environment Agency by building on high-risk land. Nick Starling, director general at the ABI, highlights: "For every £1 spent on protecting communities from the devastating impact of floods, £8 is saved to the economy."

Aviva has been developing a sophisticated tracking map using lasers in conjunction with hydrologists JBA Consulting. The map was then exposed to a simulated one-in-200 year scale rainstorm.

Jill Boulton, technical director at JBA Consulting, says: "This flood model is a huge advance in understanding the risk that surface water presents and certainly means that the UK is leading the way in this kind of mapping technology. It also helps answer the questions that cannot be explained by just river flooding maps: how do we measure the impact that freak downpours can have on homes and businesses? This technology means we are way on our way to solving that problem."

Histories
Simon Black, head of flood mapping at Aviva, is keen to point out that the cost of insurance does not necessarily increase for those in flood areas as a result of the research because buildings will be identified individually to ensure that they are not discriminated against unfairly.

Unfortunately, envisioning the scope for practical improvements to reduce flood risk is hard to do; insurers feel that it is the government's responsibility to create a level playing field for all industry players.

Nigel Clarke, executive director at loss adjuster MYI, says: "It is difficult for insurers to act in isolation. They are working with the various agencies and the government but widespread flood defences are major capital projects. On a risk-by-risk basis, it is hard to see what insurers can do in isolation because flooding affects very large areas, so action needs be taken on a much wider basis by those responsible for reviewing and improving flood defences."

Clarke gives the following examples of improvements in rebuilding: "I know of one project where, following a fire, it was necessary to rebuild the factory - located in an old industrial area - with drainage to cope with a 125-plus year flood event. That was part of the planning permission for reconstruction but none of the other buildings around it has similar storm water capacity."

Beck has also seen a gradual shift in brokers towards talking more about risk management variables such as flooding histories, valuables not being left on the ground floor and having a contingency plan for staff.

Pitt Review
The government is improving flood defences with its annual flood fund of approximately £600m; the Pitt Review sets out its strategy (http://bit.ly/Pitt-Review). However, there have been few upfront incentives for insurers, businesses or households to improve flooding resilience inside buildings. In a recent interview with PB, Andrew Torrance, chief executive officer at Allianz, said: "The notion of a level playing field for industry is very important; the industry can and should make the argument to government about what is a sensible set of regulations to put in place to improve the sustainability of the built environment over time."

There are wide implications for risk and reconstruction. Clarke remarks: "In the commercial arena in which we work, the main difference from what we might have seen 20-plus years ago is the reliance on electronics in equipment and IT infrastructure: damage to these has the potential to cause businesses severe problems. No longer is it possible to simply strip a piece of machinery down, clean it and put it back together again."

This new technological paradigm has implications for insurance policies. Clarke explains: "It's truly important for companies to get the right cover to protect their businesses, with suppliers' extensions and denial-of-access cover in place. Furthermore, while it can be relatively quick to clean a factory, a business cannot operate without machinery and, if lead times for replacements are extended, the effects are often felt for far longer than a business might suspect, so setting the business interruption indemnity period correctly is vital."

As flooding becomes more unpredictable, clients will need to be considered increasingly as individuals; if you have not already, it is time to start talking to clients about how they can take practical steps to minimise flood risks. Perhaps one day, the government will force all insurers to replace flooded buildings with more flood-resistant materials; it might be more expensive as upfront capital expenditure but the long-term benefits are increasingly persuasive.

• For a real-life insight into an insurer, broker, loss adjuster and business working together after a flood, go to www.broking.co.uk/1603870.