In this second of a short series of posts about ethical issues raised by the current debate about flood insurance, I’m going to draw in large measure upon a report published this summer by researchers at the University of Dundee, on a project called ‘Insurance Provision and Affordability in Flood Risk Areas’. It looked at the likely impact in Scotland of the cessation of the Statement of Principles on flood insurance in 2013.
They identified three categories of households living in areas of significant flood risk who would have particular difficulties bearing premium increases that would result from the ending of a cross subsidy estimated to amount to about £430 per household. The categories are:
Using data from the Scottish Index of Multiple Deprivation and the Scottish Environmental Protection Agency’s main flood map, the researchers estimated that about 14% of people living in areas of significant flood risk fell into these three categories, amounting to about 41,000 people in total.
So for roughly 41,000 people in Scotland, the question of affordability is very important. That’s not a small number for a country of any size, let alone that of Scotland. While only a small proportion of them will be affected in any one period by a 1 in 75 year flood (what an area of significant risk represents), that’s not the point. All of them will be affected as premium increases kick in and they either discontinue the insurance they can no longer afford, or make sacrifices in an already tiny budget to protect the home many will cherish. Of course some will not have insurance in the first place, but many, particularly the elderly, will.
The potential for such people to face exclusion from the ‘insured community’ is another form of unfairness lurking around the debate over the future of flood insurance. It is a form of unfairness that might provide a litmus test for how insurers could deliver on their promise on the affordability of flood insurance.
Let’s take this ‘exclusion from the insured community’ form of unfairness and use it to reappraise two of the other forms of unfairness mentioned in the previous post (unfair cross subsidy and unfair levels of risk differentiation). In particular, let’s use it to locate some point between the two that takes account of both their fair side and their unfair side. In other words, the point of compromise between two apparently competing forms of unfairness.
To deliver on their affordability promise, insurers could set their flood risk pricing at a geospatial level that keeps ‘exclusion from the insured community’ to a minimum. This would effectively mean only drilling down to some level of sub-regional pricing for flood cover, as opposed to the property by property level currently available. This would retain some level of both risk pooling and rate differentiation, but of perhaps equal importance, retain the availability of insurance for as wide a cross section of society as possible.
Insurers may view this as an uncomfortable, compromised improvement on the present position. Yet it appears to be rather similar to another approach being given prominence, whereby policyholders in areas of flood risk pay a maximum premium for such cover of £300, while at the same time all householder policholders pay a levy of just over £3 to boost the reserves for flood events. Over this would then sit a reinsurance programme.
In the next post, I’ll look at a further apparent unfairness creeping into the flood insurance debate, this time between risk pricing and risk reduction.
Duncan is the founder of the Ethics and Insurance blog and the author of its many posts. He's a Chartered Insurance Practitioner, having worked 18 years in the UK market. As an adviser to many firms on ethics issues, as well as a regular conference speaker, he is one of the leading voices on ethics and insurance.