At the end of last year, DEFRA issued its latest report on flooding risks. This followed from the results of the examination undertaken by three separate working parties set up in September 2010 to look into in the financial risks from flooding, how to ensure that insurance against flooding remains as widely available and affordable as possible and the availability of information about flood risks.
At the moment, there is an agreement between the government and the insurance industry, which is scheduled to expire in September 2013. This agreement enables the cost of flood insurance to be widely spread amongst those taking out normal buildings, contents and business interruption insurance. Those who insure in high risk areas pay a lower premium than the risk would otherwise attract; those in low risk areas, pay a higher premium than they otherwise would. There is therefore a form of cross subsidy.
The DEFRA report makes it clear that this form of cross-subsidy is very likely to be scrapped when the agreement between the government and the insurance industry expires in 2013. The report emphasises the government’s desire to reduce or eradicate flood risk and thus allow the market to determine the level of premiums, rather than to artificially manipulate them.
It is very likely therefore that for many business and households in higher flood risk areas, the cost of flood risk insurance will increase and possibly become unavailable. The danger will be that many properties will be without flood risk insurance.
The availability of information about the flood risk for any particular property is going to become critical. At the moment, there is limited information available from the Environment Agency website. This and other conventional searches undertaken when buying or letting property, look at the risk from coastal or river flooding, and not at surface water flooding. It is this latter form of flooding, which causes most flooding in a typical year and is usually cause by a watercourse some distance away. The flood risk profile of a property will affect the availability of insurance and therefore value and mortgageability.
Now more than ever before, it will be necessary to check the flood risk profile of the property to be bought, let or mortgaged beforehand and whether flood risk insurance is available on acceptable terms.