With the industry still lobbying hard for increased investment in flood defences, talk is turning again to the issue of unsuitable property development on at-risk land. While insurers have taken this summer's £3bn clean up bill on the chin - and continued to maintain cover - it is becoming increasingly insistent that sensible precautions need to be taken. Rachel Gordon reports
Bearing in MIND the UK insurance industry is facing a bill of at least £3bn for the two major flooding incidents this summer, it has arguably been very accommodating in its approach to maintaining flood cover. As the clean up continues, policy exclusions are a rarity and, for the unaffected, memories are short.
But if proposed new property developments go ahead on acknowledged flood plains, we may see a less phlegmatic attitude from the industry - indeed, we could experience a crisis of volcanic proportions. Potentially this could result in uninsurable, white-elephant developments, litigation against developers, planners and other bodies, and the government forced to foot the bill as insurer of last resort.
There are a host of issues and parties involved - and insurers are often in the unenviable position of either being used as scapegoats with blank cheque-books, political footballs or simply targets for criticism.
It is clear the overcrowded UK needs more affordable housing and, earlier this year, Yvette Cooper, Minister of State for Housing and Planning in the Department for Communities and Local Government, said that three million new homes will be built by 2020 - some of these on flood plains.
Yet, only a few months later at September's Labour party conference in Bournemouth, Baroness Young, chief executive of the Environment Agency, urged local people to speak out against a proposed new development in Swanpool, Lincoln. Up to 4500 homes are planned for construction on flood plain land there and, she argued, if it goes ahead, flood risk will increase for the rest of Lincoln. In a separate incident last month, Baroness Young sparked anger from the insurance industry when she called for insurers to withdraw cover from developers building on unsuitable land.
The good news for the insurance industry is that Jane Milne, head of property at the Association of British Insurers, already has the ear - and respect - of government, and is ensuring the industry's position remains clear with consistent messages.
For example, last week, the ABI again urged the government to spend more on flood defences and wants funds earmarked for the future to be used now. The government currently spends £570m a year improving and building new flood defences, but has pledged to increase this to £800m annually by 2011.
Ms Milne explains that insurers supported the appointment of the Environment Agency to statutory consultee status, when it comes to planning authorities assessing the flood risk of proposed new developments, introduced as part of the revised PPS 25 - Development and Flood Risk. But the EA is only there as an adviser - it has no right of veto. If it does object to a proposed development, this will be referred to the Secretary of State for Environment - but planners may still win the battle.
Ms Milne explains: "It is too early to see how effective the EA is going to be but we are reassured by it being involved and it has the right expertise. However, we need to see if developments are being rejected or modified on the basis of its recommendations."
And, according to Ms Milne, this cannot always be said for those making planning decisions. "There is a lot of variation. Some, of course, are knowledgeable, but there are shortages of planners and we would like to see higher level training. Added to this, you have locally elected councillors who are pushing for development but without the necessary understanding."
She emphasises that insurers can be put in a difficult position. "We are not looking to be the final arbiters - it is not our role. We want to make sure all parties understand our position and to provide guidance. The Council of Mortgage Lenders is also closely involved in this issue and we are working with them - its members will not be able to provide mortgages for uninsurable properties."
As Peter Adlington, manager of property and commercial reinsurance at Allianz, comments: "This whole subject is a hot potato and while we have great sympathy with Baroness Young's frustrations on the subject of flood plain development, we are equally not comfortable with the insurance industry taking the role of 'enforcer' for the Environment Agency."
He wants insurers to continue playing a key part in the debate, through initiatives such as ClimateWise - where insurers look to build the impact of climate change into their business - and increasing dialogue with clients and other parties such as building contractors and planners.
"This will mean new disciplines for our underwriters and surveyors and here I see an opportunity for brokers to add still more value to their offering, possibly some extra fees, and certainly the warm glow that comes from helping the environment."
For his part, Simon Gifford, claims director at Towergate, comments: "I don't think there is a need for too much doom and gloom. Planning procedures have been tightened and the whole issue of climate change is high on the agenda. If the ABI can keep this issue in the public domain and lobby effectively, the government will spend money on flood defences - and that will mean continued insurance."
David Williams, Axa's claims director, says the consequences of not being involved in the debate and merely refusing to provide cover are simply too serious. "We've already got too many cases of 'pass the parcel' going on in this area. We all know what happens when people are affected by floods and don't have contents cover. If these new property developments go ahead, we must ensure the residents can have protection."
He adds that progress has been made. "There are better materials being used, and some developments comprise three-storey properties, where the ground floor is just the garage. We may need to look at other areas, such as cover with higher deductibles - or perhaps a housing association might be able to self-insure up to a certain limit. A shop keeper knows shop-lifting is inevitable and needs to take measures like increased security. Likewise, local authorities and those responsible for developments may be able to work with insurers to find answers that work for them."
Mr Williams also emphasises that he favours parts of the Scottish planning system and believes these could also work well in the rest of the UK. "In Scotland there is widespread use of flood liaison and advice groups, where insurers play a role alongside councillors, planners and developers. Insurers provide detailed insurance advice, which has been requested by almost every local council. This advice is given freely and regularly in face-to-face meetings on how it relates to land use planning, sustainable drainage and sustainable flood management measures. This has been happening for the past 10 years north of the border."
Aon's chairman of European real estate, Bill Gloyn, also wants flood risk to remain high profile, but argues that the industry should not be too conciliatory. "Insurers are not there to be a long-stop and it annoys me that the availability of insurance is being used as a smokescreen. The fact is, some of these developments should not be happening and there is already evidence that Swanpool, for example, could be a potential disaster."
Ignoring the problem
He says Baroness Young has made valid points on the need for planning restraint but she has also, on occasion, been ignored. "If a bad decision has been made, then insurers should not be dragged into meetings with planners. It is clear that some are just thinking about the present - it is vital the government takes further action and that means spending more on defences."
Mr Gloyn argues that flood plain developments could also need cover provided from a government compensation scheme rather than insurers. "There is a problem out there and the government needs to grasp it. It is unpalatable, but taxpayers may need to pay more towards this."
Meanwhile, Graham Smart, director with loss adjuster MYI, points out: "If flooding remains as prevalent then I believe we will start to see certain perils taken out of policies or much higher deductibles. Beyond this, we could see a whole new industry in private flood defence initiatives."
Mr Gloyn adds that if there are further incidents of severe flooding, then reinsurers may withdraw cover. "This happened in the case of terrorism, albeit temporarily. We don't know whether there might be a knee-jerk reaction towards flood cover. I want to see this issue attract as much publicity as possible and for the realisation to dawn that this matter is serious."
As far as brokers are concerned, several are already looking to assist property developer clients where possible (see box, below). Mike Townson, a director with Oval, says 'riskier' new developments can work as long as no one shirks responsibility. "We've had experience of brownfield sites where schemes have been arranged to redirect water. Proper planning takes time and can involve more cost for developers, but insurers are willing to provide cover if they can see risks are managed."
Mr Townson says politics - both at local and national level - should not get in the way of an increasing problem. "A lot of land with planning permission has been sold off. We need more pre-development consultation so proposed homes and businesses can benefit from advances that have been made. Flooding can ruin lives and businesses and we've seen the devastation this summer. But there are examples of best practice out there and these need to be shared."
Gareth McChesney, Allianz's household manager, says flood defences work - and now is the time to be spending on them. "If you look at the example of Chichester, the town centre and residential areas were frequently flooded but its flood defences have been proven to work."
Chichester was affected by overflows from the River Lavant and, in 2001, instigated a £5m scheme involving flood water being diverted from the cathedral city towards the sea, where it is pumped over sea defences.
Mr McChesney comments: "This scheme was prompted by severe flooding but it works and people continue to be insured in Chichester. It is clear that more property development is going to take place across the UK - but if the government wants this, it must be prepared to pay for the necessary defences."
He adds that innovation in this area exists and one development he is aware of incorporates a moat structure proposed to protect against flooding. Another new scheme planned for Scotland would involve floating 'flotilla' properties. Putting the potential cost of increasing flood claims that could follow inappropriate planning and developments in perspective, Mr McChesney points out that Allianz's average flood claim this year was in the region of £25,000 to £30,000. "It is not hard to work out that you need a lot of premiums to pay for such claims - and, so far, household cover remains reasonably priced at a few hundred pounds for most people."
He agrees that flooding issues must be tackled in the early planning stages. "We need to see less money being spent after the event." Alan Gairns, Royal and Sun Alliance's property development manager, agrees: "I am concerned that guidance from the Environment Agency may be ignored and continue to look closely at what is happening in this area. There are so many developments proposed - some high profile, such as those in Swanpool and the Thames Gateway, but also a lot of smaller ones where building can cause knock on problems to established properties. There must be more focus on sustainability."
The Environment Agency's early findings of the floods show that, while many people were affected by overflowing rivers, this was not the sole cause.
It points out that in Hull, for example, five times as many homes and businesses were flooded by overflowing drains and sewers as were affected by river flooding. These areas were overwhelmed by the sheer amount of rainfall.
One of the main difficulties in tackling drainage problems is that several different organisations have responsibility for them. The EA wants more involvement and to see local authorities as the lead authority for the local co-ordination of drainage and surface water issues, working with their water companies and developers.
And, according to Jane Milne, head of property at the Association of British Insurers, the industry is also lobbying hard in this area. "There is a lot to do. The Department of Environment, Food and Rural Affairs has been carrying out pilots on more integrated drainage, but it has been clear there have been problems for years and we are getting impatient."
She says the ABI wants regulator Ofwat to take tough action against water companies that fail to maintain and invest in drains, but adds this is only part of the cure. "Drainage is the great unknown. We need proper mapping of the state of the country's drains so that we can find out how bad things really are."
And, Alan Gairns, Royal and Sun Alliance's property development manger, says: "We have a fragmented system in terms of responsibility and no real strategy. The pumping system broke down in Hull exacerbating problems and so we also need to ensure there are contingency plans in this area."
Lockton's real estate and construction division specialises in arranging cover for developers and its chief executive officer, Richard Owen, says that there are solutions out there.
"Contrary to popular belief, there are underwriters who are prepared to insure some flood plain developments. We have been active in designing programmes for developers, which include a provision for the insurers of the development to cover individual home owners' properties after the house sale, should traditional household insurers prove unwilling to carry the risk," he comments.
He explains that insurers need to look beyond post codes - which are not necessarily accurate - and that brokers may also be required to provide detailed geotechnical data. Insurers in particular are interested in the method of construction and the materials used.
For one particular development in the east of England, Lockton investigated previous floods in the area to show that, while there was proximity to a river, the actual site had never been impacted by a flood in previous years. due to the gradient on the site.
"By being proactive, and having that information to approach the insurance market with, we gave them the necessary reassurance; insurers are currently prepared to be pragmatic about these situations - as long as they have the relevant information with which to assess a risk," adds Mr Owen.
He concludes that the key to finding solutions must come from "joined up thinking" between planners, developers, insurers - and their brokers.
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