Climate change and flood insurance

Dr Swenja Surminski and her colleagues at the ESRC Centre for Climate Change Economics and Policy have been investigating efforts by the UK Government and the insurance industry to reform flood insurance in the UK, and ensured that plans for a new scheme have taken into account the impacts of climate change. In 2013, the Statement of Principles on the Provision of Flood Risk – an agreement between the Government and insurance industry that enabled the provision of insurance to homes at significant risk from flooding – expired. The insurance industry and UK Government announced that it would be replaced in 2015 by a new scheme, called Flood Re. The scheme aims to ensure that household property insurance continues to be widely available and affordable in areas of significant flood risk by raising a levy on all policy-holders’ premiums. The design of the scheme has been the subject of long and difficult negotiations between the UK Department for Environment, Food and Rural Affairs (DEFRA) and the insurance industry.

Dr Surminski’s research has found that more frequent and severe flooding as a result of climate change is a barrier to the continued availability and affordability flood insurance and that overcoming this barrier is not well understood by the Government or the insurance industry. She has pointed out that linking insurance to effective adaptation and flood risk management is likely to play a crucial role in ensuring affordability and availability. However, these issues were not fully taken into account in the initial design of Flood Re.

In June 2013, Dr Surminski and her colleagues responded to a consultation by DEFRA about the proposed design of Flood Re. In their submission, they pointed out that the impact assessment for Flood Re, which the Government expects will operate for between 20 and 25 years from 2015, had failed to take into account any increase in flood risk through rising sea levels and shifts in rainfall due to climate change. They highlighted the Climate Change Risk Assessment, published by DEFRA in January 2012, which concluded that the number of residential properties in England and Wales exposed to a significant risk of coastal or river flooding could increase from 370,000 in 2008 to between 450,000 and 800,000 by the 2020s, even when assuming no new buildings.

Dr Surminski and her colleagues recommended that Flood Re should promote awareness of flood risk and help to reduce risk by encouraging and rewarding households to take steps that increase their resilience to flooding. They also called for a clear plan for how the scheme would be phased out within the target period of 20-25 years.

Dr Surminiski’s research was promoted to the Centre’s network of key decision-makers and to the media. It received some coverage, including in ‘The Guardian’, and Policy and Communications Director, Bob Ward, also appeared on BBC television news to discuss the scheme’s design flaws and the government’s broader failings to appropriately manage rising flood risk. Dr Surminski also participated in the public discussion via the widely-read LSE British Politics and Policy Blog.

In early November 2013, DEFRA published a response to the consultation which acknowledged that climate change should be taken into account in the design of Flood Re, stating: “A revised Impact Assessment will be published alongside the amended flood insurance clauses. This has taken account of the consultation responses, notably in terms of developing the analysis of transition to a free market, the potential impacts of climate change, impacts on property values and the costs of the options.”

The revised impact assessment was published on 29 November 2013. It acknowledged that improvements in defences to protect against river and coastal flooding would be required to ensure that the number of households requiring access to Flood Re would not increase over the next 20-25 years. Without flood defence improvements, the number of households requiring assistance from Flood Re would increase, leading to a likely increase in the levy that would need to be charged for all policy-holders, and potentially undermining its future viability.

Since then Dr Surminski has continued to engage with policy-makers and the insurance industry. Following the response to the consultation, Dr Surminski and her team disseminated a short critique of the proposed Flood Re scheme to all Members of Parliament ahead of a key debate on the issue in the House of Commons. Dr Surminski and her colleagues were also invited to meet with the DEFRA team responsible for the design of the Flood Re scheme to discuss its implementation, and this has led to an ongoing dialogue and collaboration. For instance, Dr Surminski is currently carrying out a survey of households in high-risk flood areas to investigate perceptions about insurance and the potential to incentivise resilience. This work is being undertaken in partnership with the International Institute for Applied Systems Analysis in Austria, with support from the UK Department for Environment, Food and Rural Affairs and the Environment Agency.

As a result of engagement with the Committee on Climate Change, Dr Surminski has been invited to be a lead author for the next UK Climate Change Risk Assessment, which sets the key priorities for Government policy on climate change adaptation. Dr Surminski will oversee the part of the assessment that focuses on business and industry, including the insurance sector.

Dr Surminski responded in September 2014 to a consultation by DEFRA on the design of the Flood Re scheme. The submission focused on the need for the scheme to increase awareness of flood risk and facilitate and reward risk reduction measures by homeowners.

Dr Surminski’s academic paper on ‘Flood insurance in England – an assessment of the current and newly proposed insurance scheme in the context of rising flood risk’ was published in the ‘Journal of Flood Risk Management’. The paper suggests some modifications to the existing Flood Re proposals to make it more focused on reducing risk in the future. Her results have also been published in the journals ‘Natural Hazards’ and ‘International Review of Environmental and Resource Economics’.

The journal papers have gained interest from around the world, and since its publication, Dr Surminski has been invited to present her findings at meetings of the United Nations Office for Disaster Risk Reduction, the Geneva Association, the German Insurance Industry Association, the Association of British Insurers and the Joint Committee on Finance, public Expenditure and Reform in the Irish Parliament.

In addition, other members of the Institution’s research hub have continued to highlight to policy-makers and the public how climate change is already having an impact on flood risk in the UK through increases in rainfall and sea level rise, for example through policy briefs and media articles.