Water – Keeping the Economy Flowing?

13th August 2012

Thousands of commercial business and residential owners at ‘significant’ flood risk await a collateral government and insurance agreement that ensures investment ‘security’.

An estimated 200,000 to 500,000 properties in England and Wales at ‘significant’ flood risk are faced with increased vulnerability as fraught debate continues between the government and the insurance industry. The policy to ensure that flood insurance remains universal, regardless of risk, is terminating and nothing has come to replace it yet. Predictions are that this termination will affect the housing market since few buyers will buy an uninsurable property – furthermore no bank will lend on this type of risky property.

On 30 June 2013, the founding principles for the provision of universal flood insurance expire and insurers won’t guarantee to insure those properties profiled at ‘significant’ risk. A house that cannot be insured cannot be mortgaged, in turn this will cut many buyers out the market as well as reduce the market price of a property.

In a recent breakout session with the Association of British Insurers (ABI), the Floods minister Richard Benyon stated that ‘The National Strategy and funding model will be issued on 18 July 2012’. Benyon went on to say that mitigating flood risk for ‘deprived communities’ was a ‘priority’, this followed a report by the Joseph Rowntree Foundation which forecast the spectre of ‘flood ghettos’ in the very near future. On Wednesday 18 July nothing came from the House of Commons, but from the House of Lords came a scathing critique from Lord Dubs who said: ‘The Insurance Industry needs to put its house in order. Will the Minister take all that into account in his negotiations with the industry?’

So why the undercurrent? The clues lie in a little known agreement called the Statement of Principles (SoP), which was forged between government and industry many years ago and renewed in 2008. It obliges all members of the ABI to insure all residential and commercial property at any kind of flood risk.

One critical obligation of the SoP was that the government would invest in flood mitigation schemes in order to reduce the real risk. However, since the coalition’s arrival the flow of money for flood defences has been curtailed. Instead of supporting the SoP, the coalition committed to cuts of over £2bn from defra (including inflation) over 5 years to 2015. As a consequence, cuts to the flood budget mean many are facing un-affordable insurance renewal premiums, or are being refused insurance. Since the cuts in funding budget breaks some of the principles of the SoP, the equilibrium of insurance prices and premiums is thrown into disarray.

Now some insurers have ‘denied’ cover for some of those at ‘significant’ risk, or are quoting their customers exorbitant premiums that reflect the risk of flooding – which is now being elevated due to a potent mix of climate change, spending cuts and upstream development. Many small businesses throughout the country have opted not to get insurance and if they flood again – shut up shop.

So where does this leave those property professionals tasked with valuing property at ‘significant’ flood risk? If someone wishes to buy a house at significant flood risk, surely the price of that house should be representative of the risk – even if it is estimated to go-under-water just once in every 75 years?

Andrew Entwistle, Chartered Surveyor for the George F White group and a member of the Valuation Standards Board for the Royal Institute of Charted Surveyors says “The Statement of Principles agreement has led to the market ignoring to a large extent the effect on value to property in flood risk areas. With the agreement removed the market will start to recognise flood risk in prices paid for property in areas prone to flooding, the extent of the price reduction will depend on a number of factors such as history, current and proposed flood alleviation schemes, and climate change. I anticipate both surveyors and buyers will become more sophisticated in identifying potential flood risk, and buyers will consider flood risk as an important factor in choosing property. There is no doubt that if the Agreement of Principles drops away with no replacement a substantial number of property owners will find themselves with a large negative equity problem.”

Several weeks ago Matt Cullen, Flood Policy Advisor at the ABI stated: “If flooding becomes a certainty rather than a possibility then insurance becomes problematic”. So if we observe the recent double flooding of Cities like Newcastle and towns like Hebden Bridge the prelude is not promising!

Insurance in flood cases is undoubtedly a problem but what is more worrying is the silence from government with an undercurrent of complaint beneath their feet. Now that the drought is over the flood of complaints is on its way.

Since the Morpeth floods of 2008 when 1,000 people were forced to leave their homes, the average percentage increase in premiums per household was 71% (MFAG Survey, 2011). Facts like this raise the spectre of ‘flood ghettos’ in some of our towns unless significant fundamental change is brought about.

So what facts spring from the undercurrent? One comes from the government’s own department – the National Environmental Research Council – which estimate that £81.7 billion worth of assets are vulnerable to river floods. Picking up the bill for fresh investment in the floods budget is probably something the government doesn’t want, but the stakes are high with £81.7 billion worth of assets vulnerable to flood.

The other risky option is simply allowing the SoP to expire. In advance of this, the Floods Minister Richard Benyon and Caroline Spelman, Secretary of State for defra are attempting to formalise the existing cross-subsidy. This would sanctify arrangements for everybody else to pay a little more on their insurance so that those at ‘significant’ risk can be insured.

Primary author:
Mike Norbury (BSc Hons),
Research and Development
t: 01665 603231
m: 07871 847198
mikenorbury@water-value.com

Co – author:
Andrew Entwistle (BSc Hons. MRICS),
Chartered Surveyor
t: 01388 529561
m: 07977 518156
andrewentwistle@water-value.com

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