Insurance Post

European floods: keeping the funds flowing

Europe flooding

Floods are an on-going threat for Europe, yet the approach to insuring and recovering from them is wide and varied. Francesca Nyman investigates how Europe is tackling the issue and what the future is likely to bring.

In July this year an overnight deluge in the Krasnodar region of southern Russia killed 170 people, causing widespread property damage along with the loss of life. In the same month several areas across the UK flooded following the wettest April to June on record.

Another wave of flooding throughout the UK this week has been a further reminder, if one were needed, that flood risk cannot be ignored. But the best way to protect those most vulnerable still divides opinion throughout Europe.

Divided opinion
The lack of synchronisation among European Union member states can be explained partly by their different risk profiles, but it is also indicative of a fundamental disagreement about where the responsibility for flood response lies.

The localised nature of flooding means that it has a disproportionate impact on a small group of the population, often a group that can be identified in advance; features such as proximity to a river, topography and the type of soil make specific areas much more vulnerable.

However, if premiums for flood insurance truly reflected the risk, those in flood prone areas would pay significantly more than their counterparts, pricing homeowners in the worst affected regions out of the market.


"In the range of the one in 25 year flood event and more exposed regions, insurance is not the best solution. If it is available it is at a price that we would say doesn't make sense." Melhorn


Temporary solution
In the UK in 2000 this quandary led to insurers signing the Statement of Principles, an agreement to offer flood insurance to homes, including those in areas of significant risk, provided that the UK government continued to invest in flood defences.

Always intended as a temporary measure, the Statement of Principles has been renegotiated twice since then, but rumbles from the industry indicate that the government has not fulfilled its side of the bargain.

The current agreement expires in 2013 and insurers are adamant that they will not renew it, arguing that it distorts the market, hinders the development of specialist flood insurance and acts as a disincentive to the uptake of measures to protect individual properties.

Reflecting the risk
In the search for a more sustainable model, one alternative being mooted is a risk-based system similar to that in place in Germany.

Under this system risk maps developed by the German Insurance Association designate different risk zones, and premiums rise according to the increase in risk.

However, insurers are under no obligation to provide insurance to those in the riskiest zones, and the consequence is that homes in this area cannot get cover.

According to Jens Melhorn, Swiss Re's head of flood, the belief that insurance should be provided for all properties is misguided.

"In the range of the one in 25 year flood event and more exposed regions, insurance is not the best solution. If it is available it is at a price that we would say doesn't make sense," he says.

"When insurance is too expensive it makes more sense for a private person to invest this money into a fund and when a loss occurs pay this out of the fund. This way they can avoid paying a service fee on top of the premiums."


"When insurance is too expensive it makes more sense for a private person to invest this money into a fund and when a loss occurs pay this out of the fund." Melhorn


Solidarity system
The notion that each should pay according to their risk is the key tenet of the German system, but the mentality does not carry throughout Europe.

For example, policyholders in France and Spain all pay the same for flood irrespective of their risk. An ingrained belief in the principle of solidarity means it is accepted that the less exposed should subsidise the more exposed.

The role played by EU governments when dealing with natural catastrophes varies greatly. Some member state governments get involved in pre-event financial planning, while others provide financial reimbursements only after an event.

Culture of dependence
The situation in Italy, where the government tends to provide financial assistance after natural catastrophe events, has led to a worrying dependence on the government and this can be an issue seen in other European countries.

"When the state promises financial assistance, which we call ex post financial assistance, rather than ex ante which is the way insurance works, you collect the premiums up front and then you have the cover ready to go. Whereas with the government, although they collect taxes they don't really have the funds to reimburse people until after the catastrophe happens, " says Carmen Bell, policy adviser at trade body Insurance Europe.

She adds: "The problem with ex post financial assistance is that it's quite slow, it takes some time to get together and if people know it's there then they are a bit more reluctant to take on adaptation measures such as investing in flood defences because they think the government will take care of them."

"What happens also in cases like this is that you have a very severe natural catastrophe and the government doesn't have enough funds to cover it and to reimburse all the people."

The appropriateness of post government intervention was listed as potential issue in several countries in the EU's Natural Catastrophes: Risk relevance and Insurance Coverage report in January this year, suggesting that the problem may be more widespread.


"When you have a very severe natural catastrophe the government often doesn't have enough funds to reimburse all the people affected." Bell


Working together
While a mix of approaches to flood is tolerated by European policymakers, there have been moves towards greater unity.

At the end of 2009 the European Commission produced a white paper that outlined future EU-level approaches to adaptation.

One recommendation was the creation of a European clearing house to make it easier to find information about the adaptation approaches adopted in different member states.

The white paper found that a significant amount of research already existed but was not shared across member states, and proposed the establishment of a web-based platform as a "cost-efficient tool" to tackle the problem.

The initial aim was to have the clearing house operational by 2011, but it has since hit a number of obstacles, primarily EU data protection rules which prevent companies submitting data containing personal information.

Addressing obstacles
"At the moment insurers can be penalised for sharing personal data, but it's impossible to share risk data without some personal details getting in there. They are asking for a more flexible political framework to help them get around this," says Bell.

"There is a review of the data protection directive at the EU level and one of the things they will address is this problem of information sharing."

One area where progress has been made in the past few years is flood defences.

According to Milan Simic, head of flood at catastrophe modelling firm Air Worldwide, there have been significant developments with computational techniques in hydraulics and hydrology.

But, like most areas of research, funding has dried up as a result of the continent's financial difficulties.

"Detailed studies of this nature require time and money and the involvement of various consultants to undertake them, so it really depends on the priority and budgets of the individual local councils and water companies," he explains.


"Detailed studies of this nature require time and money." Simic


Flood maps
Another interesting development is the news this month that independent Zurich-based organisation Perils will make satellite flood maps available for European jurisdictions.

For insurers the tool is designed to enable quick first impact analysis and loss estimates after a flood, but the maps could also be used by local authorities to react to an evolving flood event.

However, after a 12-month free trial period the maps will be offered for a licence fee, which the firm's head of products, Eduard Held, is aware could put them out of the reach of many local authorities.

"For larger insurers, reinsurers and brokers the price should not be a problem. For really small local authorities we might want to think of a price schedule that takes into account the size and nature of the users," he says.


"Irrespective of the financial crisis, floods will remain part of our future and measures still need to be taken." Vos


Funding vital
As a cash-strapped Europe struggles to deal with searing austerity, investment in flood research and risk mitigation may rank low on the list of priorities, but the economic and human cost of ignoring flood risk is high.

Claims handlers witness first-hand the aftermath of flooding, and Mark Vos, a representative for the Federation of European Loss Adjusters, is adamant that money must be found.

"Initiatives in many countries have shown that investment pays off and reduces the need to respond in dramatic human circumstances where aid is essential," he says.

"Money is needed to invest in short-term aid and to provide long-term water management solutions. Irrespective of the financial crisis, floods will remain part of our future, and measures still need to be taken."

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