The Chartered Insurance Institute

Number 73 April 2012 (updated November 2012)

Qualified CII members: reading and reflecting on this Thinkpiece can count as Structured CPD under the CII CPD Scheme. See the last page for details.

Is it Possible to Have Sustainable Flood Insurance without Sustainable Flood Risk Management? David Crichton MA(Hons), FCII Chartered Insurance Practitioner

Summary

• The floods in England and Wales in 2007 produced insured losses of over £3bn. Yet this was only the 12th wettest summer since records began. Moreover, the heaviest rainfall spared the low-lying southeast, with its high concentrations of vulnerable property.

• Much of the damage in 2007 was due to surface water floods. Such flood losses should be largely preventable by the installation and maintenance of properly designed drainage systems, and the regular cleaning of watercourses as part of a sustainable flood management policy.

• Many countries in the world have adopted a sustainable flood management policy. Notable exceptions include Ireland, Queensland in Australia, and England and Wales. Each of these have suffered historic scale flooding in recent times.

• Is there a connection between an absence of sustainable flood management and greater vulnerability to flood losses? Is flood insurance sustainable without sustainable flood management?

• The floods in Queensland in 2011 were so catastrophic that the Australian Commonwealth and Queensland Governments were moved to review the whole structure of flood insurance.

• Their findings demonstrate that the problems of sustainable flood management and the availability and affordability of flood insurance are not confined to England and Wales.

The Chartered Insurance Institute is the world’s largest professional body for insurance and financial services and is the leader in awarding qualifications to industry practitioners. Our Thinkpieces are a key part of our ongoing commitment to promoting innovative thinking and debate within the insurance and financial sectors. In 2012 we are celebrating our Centenary as a Chartered body. The views expressed within the article are those of the author and should not be interpreted as those of the Chartered Insurance Institute or its members. The author has asserted his right under the Copyright, Designs and Patents Act 1988 to be identified as the copyright owner of the text of this work, and has granted the CII worldwide perpetual licence to reproduce and distribute it in whole and in part. We welcome suggestions from potential contributors, but we are also seeking feedback from our readers. We urge you to get involved—especially as we intend some of our articles to be open to rebuttals for publication.

CII Thinkpiece no.73 (April 2012 – updated November 2012) – Sustainable Flood Management Page 1

CII Introduction: Climate change models are predicting more extreme and uncertain weather. A particular concern stems from extreme rainfall events.Scotland and much of Europe have managed to reduce the incidence of flooding using sustainable flood management methods. England’s refusal to consider more sustainable solutions is resulting in a growing incidence of flooding and in 2012, Wales resumed allowing flood plain development.Flood insurance in the UK has been the subject of a succession of market agreements with government since 1961.The latest, known as the “Statement of Principles” is due to expire in June 2013 and will not be replaced. It was intended to maintain the availability of flood insurance for homes and small businesses even in flood hazard areas.Will its demise pave the way for the introduction of sustainable flood management in the UK? David Crichton has written the “Flood Fact File” for the CII since 2004. The 21st edition was published by the CII in January 2012.1

What is Sustainable Flood Management?

Gilbert White has been called the “father of flood plain management”. His doctoral dissertation, “Human Adjustment to Floods”, has been called the most influential ever written by an American geographer.2 "Floods are 'acts of God,'" he wrote, "but flood losses are largely acts of man."3

White was correct. Almost every flood loss is the fault of someone, be it the planner, the developer, the landowner, the architect. In fact, any of the experts the public should expect to be able to rely on to behave prudently to avoid the risk of flood losses. Some common causes of flood losses are shown in Box 1.

White championed the holistic management of floodplains, suggesting we should live with Nature instead of fighting it with "structural" solutions like flood walls. He advocated sustainable uses of natural resources. His ideas have since been developed into what is now generally known as “Sustainable Flood Management”. The following table is the author’s attempt 1 David Crichton, Flood Risks and insurance, CII Fact File (member only resource updated annually), Jan 2012. 2 White, G. 1942. “Human Adjustment to Floods” Chicago: University of Chicago Department of Geography, Research Paper No. 29, 1942, published 1945. 3 Author’s emphasis. Floods are not always acts of God. Contemporary geographers like Ronald Hewitt were amazed at the severity of the rain that caused the Lynmouth floods in England in 1952. (See Hewitt, R. 1957 “From Earthquake, Fire and Flood” Allen and Unwin, London.) It was only when papers were released under the 30 years rule that the government’s top secret cloud seeding activities in the area just before the flood were revealed.

to summarise the latest thinking on sustainable flood management and compare it with traditional structural solutions.

Box 1: Common causes of flood losses

Hazard

• Undersized drainage systems.

• Failure to clean or maintain drains, culverts or watercourses.

• Overloading sewage systems.

• Building flood banks on agricultural land thus removing flood storage.

• Failure to adapt rivers and lakes to increased rainfall.

• Building inadequate flood defences or failing to maintain them.

Exposure

• Inappropriate development in the flood plain.

• Building on low lying coastal zones vulnerable to erosion.

Vulnerability

• Building regulations with inadequate resistance or resilience.

• Failure to provide adequate warnings or raise awareness of the risk.

Table 1: The Crichton view of traditional structural solutions compared with sustainable flood management

Structural Sustainable Flood Management

Try to control hazard by building walls, embankments, culverts or dams.

Address hazard, exposure and vulnerability, whichever is most cost effective.

Eg: land use planning controls, allowing fields to flood to save houses, planting trees, restoring floodplains, making building regulations resilient and applying them retrospectively to flood repairs.

Capital intensive civil engineering with high maintenance costs.

Find the most cost effective, natural and sustainable solution. Eg: “buy out and relocate”.

Insurance of little importance.

Insurance is a crucial tool in changing behaviour and funding resilient reinstatement or relocation. Insurers can work in partnership with government to offer advice to planners about the insurability of proposed developments and model the costs of different types of flood events to advise the emergency services.

Insurers can also advise on business continuity issues to enable companies to recover quickly by diversifying suppliers.

CII Thinkpiece no.73 (April 2012 – updated November 2012) – Sustainable Flood Management Page 2

Table 1: The Crichton view of traditional structural solutions compared with sustainable flood management (continued)

Structural Sustainable Flood Management

No statutory duties to maintain or clean drains or watercourses.

Allow flood victims and insurers to sue experts so they behave responsibly, and claims costs are recovered. Apply statutory duties to utilities and local authorities to maintain watercourses and drains.

Flood walls cannot be relied on for protection. In Keswick in England the River Greta rose above the 2 metre mark in 2009.

All photos courtesy of Keswick Flood Action Group

Then it kept going until it over-topped the flood walls:

High flood walls can change the character of the town. In Keswick it was decided that the flood walls should be raised with glass panels so as not to spoil the view of the river but not every town will be able to afford this.

A sustainable flood management approach has now been adopted in many countries, including France, Germany, Switzerland, Wales and Scotland as well as parts of the USA and Canada. From 2000-2003, the Association of British Insurers (ABI) funded an insurance expert to attend meetings of 19 Flood Liaison and Advice Groups (FLAGs) in Scotland. These covered almost every Scottish local authority (except Moray which refused help) from Shetland to the Borders, representing 94% of the population of Scotland, to advise planners on insurability issues, at no cost to the taxpayer. After ABI funding ceased, an individual insurer provided sponsorship and many FLAGs still meet even today.

Scotland has now been recognised as the leading country in Europe in sustainable flood management.Although average rainfall in the west of Scotland rose by 50% 1961-2004, and it has had the highest ever recorded levels of rainfall in 2011, there have been no serious incidences of flooding in Scotland for the last ten years

Inexplicably, the ABI did not publicise the achievements of its involvement in the FLAGs initiative in Scotland or try to promote it in the rest of the UK. Scotland has now been recognised as the leading country in Europe when it comes to sustainable flood management, with more than

40 ways in which the flood risk is lower than in England.4 This was made possible by a devolved government in Scotland which was prepared to listen to insurers (unlike its counterparts in England). As a result, although average rainfall in the west of Scotland rose by 50% between 1961 and 2004, and Scotland had the highest ever recorded levels of rainfall in 2011, there have been no serious incidences of flooding in Scotland for the last ten years 4 David Crichton, Flood Plain Speaking, CII Knowledge Services, Mar 2012.

CII Thinkpiece no.73 (April 2012 – updated November 2012) – Sustainable Flood Management Page 3

(other than in Moray where 995 homes were badly flooded in 2008 and 600 in 2009).

Two other places besides England which do not use sustainable flood management are Ireland and Queensland in Australia and it is interesting to look at how their insurers have coped with recent major floods.

Ireland

Most costly recent flood: Nov 2009, insured cost €244m

The November 2009 planning guideline for flood issues in the Republic of Ireland is an 81 page document, based on English planning guidelines which, like England, allow development in flood hazard areas, despite efforts by the Irish Insurance Federation (IIF) to persuade government to act more responsibly. The IIF even offered to assist with establishing and supporting FLAGs to help government as the ABI did so successfully in Scotland.

The Irish insurance industry’s suggestions were completely ignored by the Irish Government. Insurance is mentioned only once in the 2009 guidelines. Banks, the finance sector, mortgages, blight etc are not mentioned at all. There is no reference to social justice issues or the question of legal liability for injury, loss or damage caused by flooding. On the other hand, “environment” is mentioned 77 times.

It is ironic that the publication of this flawed planning guidance coincided with the most costly floods in Ireland’s history. There was severe flooding in Southern Ireland in November 2009, especially in the city of Cork. Irish flood insurance losses exceeded €244m. Even before these floods there was “blue lining” of some flood hazard areas where flood insurance is refused based on topography and history of flooding.

A new government in Ireland has finally started talking to insurers after fresh floods in October 2011 on the East coast and in Dublin cost over €127m.

Queensland, Australia

Most costly recent flood: January 2011, insured cost US$2.2bn

In 2011 severe floods affected Queensland, Victoria, and New South Wales. Total damage was US$6,150m, but the insured loss was only US$2,255m due to the number of

claims declined. There were 22 fatalities.5 According to The Insurance Council of Australia (ICA), 58,463 residential and commercial claims were made as a result of the floods.6

After the 1974 Brisbane floods in Queensland, the Australian insurance industry decided against offering flood insurance on a general basis because of the lack of data on flood risks. As data and technology improved, this decision became less easy to justify. Only one major insurer, Suncorp (formerly Royal Sun Alliance) decided to invest in flood mapping technology, working with Macquarie University. They offered to share the technology with other insurers, and the ICA produced flood risk data to enable all member companies to offer general flood insurance but Suncorp’s competitors refused to change their approach.

Suncorp is the largest insurer in Queensland and did provide full flood cover as part of its policies. Thanks to their investment in flood mapping, they had realistically priced their risks and were well covered by reinsurance so as far as they were concerned, there was no real problem. Suncorp claims account for 45% of the total accepted flood claims in Queensland. However, some insurers by excluding flood were able to offer much cheaper premiums. When Suncorp’s claims are removed from the total claims, the proportion of declined claims was 39%.

As a result of these floods, three separate reviews were started at national level in Australia:

the Commonwealth Treasury Review, published November 2011;

the Natural Disaster Insurance Review, published November 2011; and

the House of Representatives Standing Committee on Social Policy and Legal Affairs Review, published February 2012.

In addition the Queensland Government set up a Commission of Inquiry into the floods.

5 Swiss Re, sigma No 2/2012 6 Declaration of Robert Whelan to the Queensland Commission, 2 Dec 2011.

CII Thinkpiece no.73 (April 2012 – updated November 2012) – Sustainable Flood Management Page 4

The Commonwealth Treasury Review

This was a discussion paper7 which highlighted the problem that some policyholders alleged that they were not aware that their policies excluded flood. This is surprising because Australian insurers go to a lot of effort to draw this to their customers’ attention. One problem could be that there are various definitions of flood used in Australia. Here are two examples:

“the inundation of normally dry land by water escaping from any watercourse, lake, canal, dam or reservoir”;

“when water that is normally contained in a water catchment system increases because of rainfall or snow melt (whether in the immediate region or elsewhere) or is deliberately released by an authority, and the water overflows onto land that is not normally covered by water into your home”.

Compare this with the standard, much simpler European definition:

“a temporary covering by water of land not normally covered by water”.8

The Natural Disaster Insurance Review

This Review9 considered the availability and affordability of insurance offered by the private insurance market, with particular reference to flood but also including other natural disasters. The Review contains 47 recommendations. Here are two important examples:

all home building and home contents insurance policies should include flood cover funded in part with government subsidies.

there should be a national repository of flood risk information.

The repository idea is not unlike the British Flood Insurance Claims Database, set up with the ABI’s assistance in 1995, which holds detailed flood claims data from 25 leading UK insurers and is used for pricing, reinsurance and claims validation.

7 Commonwealth Treasury, Reforming flood insurance: A proposal to improve availability and transparency, Consultation paper, Nov 2011 8 European Directive 2007/60/EC on the Assessment and Management of Flood Risks. Official Journal of the European Union, L288/27. Published on 6 Nov 2007. 9 Natural Disaster Insurance Review Inquiry into flood insurance and related matters. Commonwealth of Australia, Canberra, 2011.

The proposals of the Review are similar to the proposals of the ABI in England, in that the Review wants to persuade the national government to subsidise premiums in high flood risk areas.

The House of Representatives Standing Committee on Social Policy and Legal Affairs

This examined the insurance industry’s response to the floods. The committee reported on 28 February 2012, but they had already laid draft legislation before Parliament on 23 November 2011 in the form of the Insurance Contracts Amendments Bill 2011.10 The Bill provides the framework for the introduction of a standard definition of “flood”.

Queensland Review

This document11 is the final report of the Commission of Inquiry into the Queensland floods. It was published on 16 March 2012 and considers the frequency and consequences of flood.

In a comprehensive review, the report covers emergency warnings, preparation, planning and response, dams, levees, and land use planning. The second part of the report examines how land use planning, building regulations, and building design can minimise the impacts of flood.

Had the rest of the insurance market followed Suncorp’s lead and priced flood insurance cover, the risk of living in a high risk area would have become much more obvious from the levels of insurance premiums, putting pressure on the government to apply stricter planning rules and building regulations.

The commission considered a report produced by Emergency Architects Australia12 which was a damning indictment of the Queensland planning system and building regulations with numerous detailed examples. The architects said:

“In our view, the findings set out in this report have serious implications for future planning and development control policies and mechanisms, the regulation of

10 House Of Representatives Standing Committee on Economics Advisory Report on the Insurance Contracts Amendment Bill 2011 Accessed 3 Apr 2012. 11 Queensland Floods Commission of Inquiry, Government of Australia. Accessed 16 Apr 2012. 12 Queensland Flood Relief Final Report, Nov 2011, Emergency Architects Australia

CII Thinkpiece no.73 (April 2012 – updated November 2012) – Sustainable Flood Management Page 5

building design and construction, information that should be provided to the public by government and for the insurance industry.”

If the rest of the insurance market had followed Suncorp’s lead and priced flood insurance cover, the risk of living in a high risk area would have become much more obvious from the levels of insurance premiums and this might have put pressure on the Queensland government long before now to apply stricter planning rules and building regulations.

The report contains no fewer than 73 recommendations for changes to the land use planning system and 26 recommendations for changes to building control. There are even recommendations for a “buy back and relocate” or “land swap” system to reinstate the flood plain. Clearly the Commission sees the main problem as the land use planning system. It appears that in one respect, little has changed in Queensland since 1817 (see box).

Box 2: General Orders after serious flooding of the Nepean and Hawkesbury Rivers

“…when the too fatal Experience of Years has shewn the Sufferers the inevitable Consequence of their wilful and wayward Habit of placing their Residences and Stock Yards within the reach of the Floods… the Compassion excited by their misfortunes is mingled with Sentiments of Astonishment and Surprize that any People could be found so totally insensible to their true Interests, as the Settlers have in this instance proved themselves.”

Issued by the Governor General of Australia, Lachlan Macquarie, 1817.13

Summary of the consequences of the 2011 floods in Queensland

As a consequence of the serious nature of these floods and the backlash from policyholders whose claims were declined, some insurers have announced that they will be providing automatic flood cover from February 2012.

If flood cover does indeed become standard in Australia, insurers in Queensland will need to face up to the problem of how to underwrite the risk in a state which does not have sustainable flood management. While many of the Queensland Commission’s recommendations would result in a move towards sustainable flood management, implementation will take time and do little to solve the

13 Quoted in Emergency Management Australia, 1998. “Floodplain Management in Australia. Best practice Principles and Guidelines.” Commonwealth of Australia, Canberra, 1998.

problem of existing properties at risk without a costly buy back and relocate programme.

In the meantime, the Queensland government might have to consider accepting a different basis of policy cover. For example, instead of “new for old” for contents cover, it might allow insurers to offer an indemnity policy or even a benefit policy (also called a “parametric” basis of cover) as currently under consideration in China.14 For more information, see the Flood Plain Speaking paper on the CII website (see Footnote 4).

England

Most costly recent flood: Summer 2007, insured cost US$4.8bn at 2011 values

Since 1961, under pressure from the government, members of the ABI, on behalf of most of the industry (except for intermediaries, Lloyds and reinsurers) made undertakings with regard to the availability of flood insurance for homes and small businesses. These have enabled property developers to continue to build in flood hazard areas. The result is that each year, more than 10% of all new build in England is at risk of flood. The effect is a continued distortion in the market where the proportion of properties at a high risk of flooding in England is more than 23% while in Wales it is 27%, compared with, for example, 4.5% in Scotland.

National Planning Framework

In England, the new National Planning Framework was published on 27 March 2012. Friends of the Earth campaigns director Craig Bennett said:

“... there are mounting concerns that ministers will unleash a building free-for-all that will infuriate local communities and devastate our countryside.”

The new framework is 50 pages long and replaces previous guidance which was 1,300 pages long. Developments in flood hazard areas can still be allowed:15

“Inappropriate development in areas at risk of flooding should be avoided by directing development away from areas at highest risk, but where development is 14 “Is Flood Insurance Feasible? Experiences from the People’s Republic of China.” George Walker, Tun Lin, Yoshiaki Kobayashi ADB Sustainable Development Working Paper Series. No. 5, Apr 2009 15 National Planning Policy Framework March 2012. Department for Communities and Local Government. Accessed 27 Mar 2012.

CII Thinkpiece no.73 (April 2012 – updated November 2012) – Sustainable Flood Management Page 6

necessary, making it safe without increasing flood risk elsewhere.”

Technical guidance is promised on how to make developments safe without increasing flood risk elsewhere, but the government has already said that they will not consider making building regulations more resilient in England.16

Lessons for England from the Ireland and Queensland floods

The main lessons would seem to be:

Stricter land use planning controls are essential to manage flood risk.

Building regulations should be more resilient.

Like Ireland and Queensland, England has yet to adopt sustainable flood management practices on any large scale. Indeed land use planning is becoming less regulated and is likely to result in even more inappropriate development in flood hazard areas under the new National Planning Framework.

Sustainable flood insurance and flood management

Is it possible to have sustainable flood insurance and sustainable risk management? When this question was put to Dr George Walker, Adjunct Professor at James Cook University in Queensland, and a leading expert in flood insurance, his answer was “no”, (you cannot have sustainable flood insurance without sustainable flood management) but he added:

“...I would also say that it is not possible to have sustainable flood management without sustainable flood insurance.”

This is very perceptive. A good example is the way the ABI’s assistance for FLAGs in Scotland helped to enable the Scottish Government to implement a sustainable flood management policy after Devolution in 1999. Japan is keen to change to sustainable flood management but recognises the need for higher resolution flood mapping so that the flood insurance market can price risks correctly to enable this to be effective.17

16 Under-Secretary of State Robert Neill explained at the flooding All Party Parliamentary Group meeting in May 2011 that the Coalition Government was not in favour of more building regulations. 17 Crichton, D. 2008, Flood Management in Japan and Britain. A comparison

The UK floods of November 2012

November 2012 produced a fresh batch of severe flooding across Wales and the west of England, with transport disruption across much of the rest of the UK. Concerns were raised about possible future problems of finding flood insurance. The UK insurance market has become polarised between the traditional insurers who wish to continue to subsidise developments in flood hazard areas and the newer, more sustainable insurers, who wish to charge the technically correct premium. The traditional insurers have been working hard on lobbying government for financial measures, while the sustainable insurers have been funding research into reducing flood costs.

Conclusion

While Queensland may come into line with Canada and Scotland, it seems that England and Ireland are unlikely to listen to insurers or to develop sustainable solutions to flood risk in the near future. The debate continues as to how to make flood insurance available and affordable in high risk zones in those countries.

There does seem to be a consensus around the need for “fairness”, in terms of social justice, as outlined in a recent report for the Joseph Rowntree Foundation.18 Given so much irresponsible development in the past in England, a sudden change to a free market in flood insurance, using risk based pricing, will not achieve social justice, indeed it will lead to damaging social injustice on a growing scale which could lead to a breakdown in social cohesion. A more likely outcome in the UK therefore is a steady increase in premiums for low hazard properties in Scotland, Wales and Northern Ireland to subsidise the growing number of properties at high risk in England. As England continues to allow development in the flood plain this will not be sustainable in the long term but may provide a temporary solution.

If you have any questions or comments about this Thinkpiece, and/or would like to be added to a mailing list to receive new articles by email, please contact us: thinkpiece@cii.co.uk or by telephone: +44 (0)20 7417 4783.

18 Social justice and the future of flood insurance, John O’Neill, University of Manchester and Martin O’Neill, Joseph Rowntree Foundation, 2012. Accessed 7 Mar 2012.

CII Thinkpiece no.73 (April 2012 – updated November 2012) – Sustainable Flood Management

David Crichton MA(Hons), FCII, Chartered Insurance Practitioner is an experienced practitioner and academic researcher specialising in the insurance aspects of climate change and natural disasters, particularly flooding. He is an Honorary Visiting Professor at the AON Benfield Hazard Research Centre at University College London. This is the leading hazard research centre in Europe, specialising in natural disasters and insurance. He is also an Honorary Visiting Professor at the Middlesex University Flood Hazard Research Centre, London; and an Honorary Research Fellow at the University of Dundee, the home of the first UNESCO water research centre in Europe and the British Flood Insurance Claims Database (probably the biggest such database in the world).

Qualified CII members: reading and reflecting on this Thinkpiece can count as Structured CPD under the CII CPD Scheme. To help you with this, we have published a set of Learning Outcomes and Reflective Questions linked to this article. Click here or copy to your browser: www.knowledge.cii.co.uk/system/files/TP73_Reflective_Questions.pdf

Acknowledgements

In the preparation of this Thinkpiece, I wish to acknowledge the kind assistance of:

Dr. George Walker, Adjunct Professor in Engineering & Physical Sciences at James Cook University, Queensland, Australia, and Honorary Research Fellow at Aon Benfield Asia Pacific;

Dr Ilan Kelman, Senior Research Fellow at the Center for International Climate and Environmental Research, Oslo (CICERO);

James Davidson, Queensland Director of Emergency Architects Australia; and

Lynne Jones of Keswick Flood Action Group,

I remain responsible for any errors or views expressed.

I would also like to thank Swiss Re for permission to quote data from Sigma 2/2012.

About the CII

The CII is the world’s leading professional organisation for insurance and financial services, with over 100,000 members in 150 countries. We are committed to maintaining the highest standards of technical expertise and ethical conduct in the profession through research, education and accreditation. In 2012 we are celebrating our Centenary as a Chartered body. For more information on the CII and its policy and public affairs function, including examples of the range of issues in financial services and insurance that we cover, please see: www.cii.co.uk/policy.

The CII Thinkpiece Series

No.72: The Need to Know: Transparency and Confidentiality in Insurance, by Duncan Minty (April 2012).

Telematics has been welcomed by onservers for finally providing insurance pricing that is usage-linked and non-discriminatory. However, like GPS devices in mobile phones, it requires customer acceptance of reduced privacy in exchange for better services. Recent stories about insurers selling customer data has left the public justifiably unsure whether the industry could be trusted. What can insurers do to win back this trust?

No.71: The Challenge of Age: Global Longevity Trends and Economic and Social Implications, by George Magnus (23 March).

George Magnus (“the man who predicted the financial crisis”) argues that the current economic turmoil is colluding with rising longevity to severely depress returns for the elderly. Governments, societies and industries must take robust action now in order to ensure that rising longevity is celebrated rather than feared over the decades to come.

No.70: Rethinking Risk: The Future of Insurance and Renewable Energy by Steve Kingshott (9 March).

With rising fuel prices now a routine feature of our time, and the spectre of a "peak oil scenario" in the not-too-distant future, investing in renewable energy has become not just a matter of curbing CO2 emissions any more. Steve Kingshott, CEO of Renewable Energy at RSA Insurance describes the work the insurance industry is doing to help deal with the challenges in renewable energy investment and development.