15/03/2010

By Peter Davy

It will be some months before the real cost of the floods that hit the Cumbria district of Northern England last November can be finally confirmed. In January, the Association of British Insurers (ABI) reported what members already expect: losses of £206 million, or more than double its previous estimate.
However, for water company United Utilities the costs could be just beginning; last month law firm KJ Commons, acting for residents living near the Thirlmere reservoir, wrote to the company for information that could form the basis of a lawsuit. Residents claim that water levels at the reservoir were above maximum level three weeks before flooding occurred, without the company taking remedial action. United Utilities maintains it does not consider itself liable for compensation, but it's a reminder that the threat of flooding isn't going away.
The reminder is very necessary, as January saw the UK Environment Agency publish the final economic tally for the devastating floods of summer 2007, which added up to £3.2 billion. Fortunately, the period since then has proved relatively benign - despite last November's floods - and not just in the UK. Aon Benfield's annual Global Climate and Catastrophe Report for 2009 finds that global earthquakes, windstorms, bushfires and tornadoes meant that floods did not feature among the year's top 10 insured losses although it was a factor in many less costly natural catastrophes. The focus appears to have shifted. "Flooding hasn't really been given the same priority it had three or four years ago," says Jens Mehlhorn, head of flood at Swiss Re. "It's slightly dropped off the agenda."
That response is mistaken, as serious flooding will recur: "Maybe not this year, but the year after, or perhaps the year after that. Sooner or later it will hit, and it's likely to be even worse than we've seen before."
A review of experience in 2009 shows that the risk is still there. While Aon Benfield reports that flooding didn't cause the most serious insured losses, it took a human toll: floods in Saudi Arabia, India, South East Asia and Fiji were four of the 10 most deadly events, and four of those causing most structural damage. But the locations meant much of the devastation was uninsured. And warnings on climate change are increasingly threatening. Swiss Re's recent report on coastal flood damage in Northern Europe suggested water levels historically seen once in 1,000 years could in future occur every 30 years - even based on the Intergovernmental Panel on Climate Change's more cautious scenarios.
Already many insurers are frustrated with frequency forecasts that bear little relationship to their actual experience. At insurer Axa, which bore the brunt of the Cockermouth flood claims, customer risk manager, Doug Barnett, questions their usefulness. That flood, he points out, was supposedly a 'once in 1,000 years' incident.
The floods of 2007 were reported as a 'once in 150 years' incident, as was the 2005 Carlisle flood, also in Cumbria. Somewhere, it seems, is periodically hit with a 'freak' event. "Is a 'once in 1,000 years' event an accurate description when you are getting one of these every year?" asks Barnett.
Turning to Ireland, the floods in Cork last November - where businesses again bore the lion's share of losses - saw insurers draw little comfort from that fact that it was, supposedly, a 'once in 80 years' occurrence. As Brian McNelis, director of general services at the Irish Brokers Association puts it: "The reality is that it could happen again next year." There's near consensus among insurers that more must be done to address the risk.

Room for improvement
Part of the response will inevitably be led by the state. On one level that can mean the government stepping in to ensure coverage; and in Ireland McNelis says it's a prospect still under discussion. However, there are well-documented problems with the US National Flood Insurance Program, as well as ambivalence towards even the British statement of principles, which the ABI contends "thwarts the market".
The UK focus will see the government give priority to pushing through its Flood and Water Management Bill, and ensuring defences are improved so the agreement to maintain cover is no longer needed. The current agreement, that runs to 30 June 2013, commits ABI members to continue insuring flood risks under standard domestic and small business policies where the risk is not "significant".
These arguments are likely to deter other countries. Australia's insurance market only recently began offering any degree of flood cover. Last October, the country's Insurance Council declared it was difficult, if not impossible, to insure against "saltwater risks" along much of the coast, and there's little appetite for any concerted effort towards a solution. As insurers see it, the government's role lies in ensuring development doesn't take place on flood zones, suggests Siddharth Parameswaran, vice president and an insurance equity analyst for JP Morgan in Sydney. "That's where they're better involved, rather than insisting insurers provide cover."
Another area is flood defence, where there is evidently scope for improvement. Despite government attention in recent years it remains an issue as the effects of climate change will vary geographically. Swiss Re's report found that coastal floods in the Baltics could actually decrease as a result, while in Spain the incidence could sharply increase. Areas that have previously been able to get away with limited defences may have to consider strengthening them. "It's very dependent on the region," explains Swiss Re's Mehlhorn.
Just as important is improved information. In Australia, inadequate flood mapping is cited by insurers for restricting the availability of cover, while information on surface water flooding in the UK remains a particular challenge - "the great imponderable", as the ABI's Malcolm Tarling puts it.
More generally, says Ernst Rauch, head of Munich Re's Corporate Climate Centre, there needs to be a push to ensure the information that does exist is easily accessible and understandable for customers; a target that the UK has actually made good progress towards. "Every home owner and business should be able to understand what their exposure is," says Rauch; an ambition that insurers can help with but where governments need to take the lead.
Not that there isn't still scope for improvement. Groups such as the UK's National Flood Forum have criticised insurers for often inconsistent pricing, and improved mapping capabilities will help rectify this. These systems have become core to insurers' business, says Graham Wallis at Geographic Information Systems (GIS) supplier ESRI UK.
Crucially, both businesses and homeowners will also play more of a role, as insurers demand they take action to better protect themselves. In the UK it's likely to be a factor as higher deductibles are imposed on property most vulnerable to floods, and elsewhere insurers are also more likely to ask what customers have done. As Rauch stresses: "Insurers have to charge adequate rates. If the answer is nothing at all, then it's likely coverage will only be available at higher costs."

Sandbags and sophistication
Much of the focus on flood prevention is on homes, but businesses are as much in need of protection: 60% of costs from the Cockermouth floods related to businesses, as did a quarter of a total £3.2bn bill for the 2007 floods, with the number affected estimated to be in the region of 7,000 to 8,000. In Cork, too, businesses were the hardest hit.
There is probably a limit to what physical defences can accomplish. At FM Global, assistant v-p and group manager account engineering, Northern Europe Operations, Russell Kirby, suggests that sandbags can still be effective and there are a variety of more sophisticated barriers now available. "We are seeing clients taking up some of this stuff," he says.
However, as Axa's Doug Barnett points out sandbags and boards aren't always practical, and while you might be able to defend a small shop easily enough, a building with 80 or 100 windows and doors is more of a challenge. In Cockermouth, flooding even reached first floor windows. "What good is low level protection in that case?" he asks.
Both he and Kirby agree, though, that there are still practical steps that can be taken, whether by relocating server rooms to another floor or simply ensuring, for distribution companies, that vehicles don't get caught on site.
"There are a lot of very simple, low-cost, effective things that people can do," says Kirby.
More significantly, it means considering the risks even if your own premises are not prone to flooding. What about the potential impact on the road network and infrastructure you rely on? What about the risks to those in your supply chain?
"If you're not looking at those questions, are you actually looking at the potential impact on your company at all?" asks Barnett. "I'd say it's a basic requirement of the risk manager's job."

Peter Davy is a freelance contributor to Risk Management Professional

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