Would Pool Re 2 solve the UK's flood insurance problems?
The frequency and severity of flooding in the UK is undoubtedly rising (no pun intended!).
The hurricane-force winds and downpours that battered Britain this week - resulting in 470 flood alerts - have again put focus on the apparent lack of progress in talks between the government and the insurance industry on the future provision of insurance for homes in flood-prone areas.
With the insurance industry facing over £1bn in flood claims following the worst September storms in the UK for over 30 years the country's government needs to increase flood defence spend if insurers are to continue to offer universal flood cover.
In the US, coverage for flood damage is explicitly excluded in homeowners' insurance policies. Since 1968, flood insurance in the US has been available through the federally managed National Flood Insurance Programme (NFIP) because insurers contended at the time that the risk was uninsurable by the private sector. While the NFIP faces its own challenges, the programme has, and continues, to provide enormous benefit to millions of Americans as was evidenced in the aftermath of Superstorm Sandy. Should such a government-backed fund be implemented in the UK?
The current agreement between the ABI and the UK government - known as the Statement of Principles - by which the insurance industry provides universal flood cover in return for government action and spend on flood defences - is set to expire next June. This July, the then environment secretary - Caroline Spelman - said that a way forward "had been found" but did not elaborate and, over four months later, there remains little sign of a suitable renewal or alternative to the current agreement.
The UK government cannot rely on the industry (and its policyholders) to keep footing the bill for any and all flood damage while it reneges on promises to improve the flood defences which would prevent these now frequent and costly events. The time has come for the UK government to accept that such flood risks cannot continue to be borne by the private sector and that a NFIP-style solution needs to be embraced by the UK for the sake of those home owners at highest risk.
While it is somewhat understandable that the UK Treasury - given the dire state of the economy - may not be keen to underwrite (even part) of such a risk at this time the options are limited. Time is running out and a new approach - based on some form of pooling arrangement - is urgently needed to ensure that flood cover remains available to those home owners most at risk. Maybe the time has come for the setting up of a new government-owned mutual insurance company as happened with terrorism risks in 1993 when Pool Re was formed?
Whatever solution is reached it will have to be paid for if flood cover is to be affordable for the most vulnerable homes. Given the increasing incidents of flash flooding in recent years - that can happen anywhere at anytime - the cost associated with a workable solution is getting bigger and bigger as each winter passes. The UK government needs to act now and implement (with or without the insurance industry's help) a viable and sustainable solution for the benefit of all concerned.
The current stand-off with insurers is unproductive. Why not give 'Pool Re 2' a chance and bring to an end the lingering uncertainty hanging over all UK homeowners when it comes to the future availability and affordability of flood insurance coverage?