Archive for Flood Insurance

Commercial Insurance Covers And UK Flood Risks

Recent extreme weather events in the UK have affected thousands of businesses, many of whom are now struggling to find commercial insurance which will cover flood damage. Instead of declaring flooding as a fundamental risk covered by Government, the powers that be have adopted a King Canute approach and last week announced a further two billion pounds worth of flood and sea defence work.
flood in 2009
Whilst Insurance blog applauds the capital expenditure on public works which are much needed in the current economic environment, this does little to address the potential losses or help those small businesses who currently cannot get cover for water damage caused by flooding.

Types of Flood
Most regions of the UK are at risk of flood to some degree due to the propensity to site populations on river flood plains and coastal areas.
Floods in the UK are either inland, which are all in some way the result of precipitation, or coastal, which can be due to either precipitation or inundation.
There are likewise varying degrees of damage caused by floods from the small localised event to the large and catastrophic.

Inland Floods
Most floods on inland areas in the UK are caused by rivers and run-off overflowing and bursting the available channels, following a long period of heavy rainfall on higher ground. A typical example of this type of flooding causing business damage is where commercial property has been built on industrial estates on river floodplains such as occurred at nationwide in the November floods of 2009 and on the River Don in Sheffield in 2007.
Sheffield incidently is also the scene of the UK’s worst man made flood disaster when the newly built Dale Dyke Dam broke as it was being filled for the first time in March 1864. An estimated 3 million cubic metres of water (700 million gallons) swept down the Loxley Valley joining the River Don in Sheffield centre and on to Rotherham, destroying 800 houses and businesses and killing 270 people.

Another type of inland flood risk is liquifaction, which is where ground water rises following a period of rainfall, saturating and penetrating buildings and ground above areas where runoff is limited. A typical example of this occurs in villages and towns lying on the chalk aquifer of the North and South Downs where spring water regularly floods basements.

Coastal Flooding
Coastal inundations are now more limited to extreme events due to four hundred years of construction of sea defences, although coastal erosion and rising sea levels are now threatening some livelihoods.

Thames flood map
The most typical coastal flooding occurs when a heavy rain bearing low pressure cyclone coincides with high spring or neap tides as occurred in the North Sea in 1953. A total of 307 people were drowned along the East coast from Lincolnshire, Norfolk and Suffolk to Essex. The greatest loss of life and damage to property was in the Thames Estaury where the extreme weather system caused a storm surge and sent a wall of water up the river drowning nearly 40 people in Canvey Island alone and leaving some 24,000 homeless and many businesses destroyed. This event led to the construction of the Thames Flood Barrier to protect London and the building of sea wall defences all around low lying ground.

Britain is not immune to Tsunamis either!
tsunami warning
In January 1607 a ten metre wave believed to have been formed by movements in Atlantic plates swept up the Western approaches and funnelled into the Bristol Channel. The resulting inundation led to the drowning of an estimated 2,000+ people, with 200 square miles (518 km2) of farmland inundated on the Somerset levels, leaving Glastonbury some twenty miles inland, as an island!

bristol channel tsunami

The likely extent of the 1607 Bristol Channel tsunami inundation provided by the Environmental Flood Agency

Drownings were recorded as far North as Worcester. Little wonder those protesting the current development of a new nuclear power station at Hinkley Point hold such fears after the recent Fukushima events.

Commercial Insurance Covers For Flood Risks

Whether your business will be able to purchase insurance to cover risks from flooding depends primarily upon the location of the business and the risk factor associated with the location as provided by the Environmental Agengy Flood Risk Map. This Government data is used by insurance companies, along with known claims data to assess the risk of flood at any particular location and to either price the risk accordingly or reject it. If you are thinking of leasing or renting commercial property is advisable to check the flood map and previous occupiers insurance, before entering into any long term agreements.

A typical commercial property insurance policy will cover or exclude structural damage to buildings fixtures and fittings and machinery caused by flood. Many policies have separate property contents cover for loss of records, office equipment and stock which may or may not be covered depending upon your situation and policy. If you operate in a flood risk area there may be certain policy limits applied which will not cover your potential losses, leaving you effectively under-insured.

Perhaps the greatest risk to a business enterprise from flooding come is the form of business interruption. A business that has suffered serious flooding can sometimes take up to six months of de-humidification and a further six months of structural repairs, before it can trade again. Other unforeseen factors such as the loss of bridges and infrastructure in a flood affected region can seriously affect turnover, even if a business has not been directly flooded.

If your business has been or has the potential to be affected by floods you will find it difficult to obtain cover on the open market. There are however many small business insurance brokers that specialise in declined commercial risks and can offer competitive premiums through managing general agents at Lloyds. It will be interesting to see how many of these survive if the UK suffers regular extreme weather as has been experienced for the last five years.

Could Flooding Become A Fundamental Risk in The UK?

For those UK underwriters and loss adjusters watching the scenes of devastation caused by hurricane Irene and particularly flooding in states like Vermont, they will be glad that their insurance company does not have to pick up the bill.

They needn’t have worried though because in the United States Flood Risk is considered fundamental and cannot be covevered under a normal home insurance policy as such…as yet!

In fact all home insurance flood risks are the responsibility of each State to provide under a national scheme. In the United States, uniquely in the developed world, insuring houses against flood damage is the sole province of the federal government.

The National Flood Insurance Program (NFIP), was created in 1968 by Congress and is administered by the Federal Emergency Management Agency, is virtually the only place to get protection against the ever increasing disasters of flood and storm surge.

From an insurance point of view the program is the same as any other private-sector insurance program.

You pay the government a certain amount and when a flood happens, receive coverage for repairs and losses.

As of June 30, the program had nearly 5.6 million policies in force with a total insured value of $1.246 trillion. But from a fiscal standpoint FEMA does not manage the NFIP like a traditional insurer.

Most insurers use a measure of solvency that looks at their capital and reserves and their ability to pay claims. In particular, regulators require insurance companies to keep a statutory reserve of liquid assets to cover potential future losses. FEMA, on the other hand, has said it manages the NFIP to generate enough premiums to cover expenses and losses for an average loss year, rather than keeping capital for the long term.

In other words it does not keep enough reserves! And guess what? It’s run out of money!

Apparantely former agency officials admit it charges rates that dramatically underprice the risks faced. That is all well and good in a normal year and when business is good, but when a worse-than-average loss year happens, the consequences are disastrous.

Folowing the disatrous hurricanes Katrina and Rita in 2005, the NFIP was more or less insolvent, without the capacity to pay the huge volume of claims those hurricanes created. Congress reacted by increasing the NFIP’s borrowing ability from the U.S. Treasury more than 13-fold, to a level of nearly $21 billion. That debt burden is, by all accounts, unsustainable.

While Irene was no Katrina, it comes on top of serious Midwestern flooding that the program has already had to deal with this year. Some people believe NFIP will stretch its debt boundaries and may well end up needing more assistance. “It may be a little bit too soon to tell but it’s certainly not going to be a very good year for the NFIP and we’ve not finished the year yet,” said Robert Hartwig, an economist and the president of the Insurance Information Institute (III).

Hartwig said a private insurance market for flood coverage is absolutely possible, with plenty of insurers and reinsurers willing to get into the business – but only if the NFIP raises its rates and if insurers get assurances from state regulators that they will be able to do the same.

Insurance Blog wonders if given all the recent flood claims in the UK due to climate change and the pressure to build houses on floodplains, whether Flood Insurance will at some point become a fundamental risk in the UK for some homes?

The UK Government would be well advised to consult with construction companies, environmental scientists, climatologists, pressure groups and Insurance companies before we reach the crisis about to hit the US Treasury.

The solution is simple – do not solve the UK housing problem by building on floodplains or areas of geographical risk.