Why the UK Insurers Will No Longer Ensure the Risk of Flood in Future - Essay Example

Running Header: Why UK insurers will no longer insure the risk of flood in future Student’s Name: Instructor’s Name: Course Code: Date of Submission: Why UK insurers will no longer insure the risk of flood in future Introduction The recent rise in risk associated with floods has made the UK insurers fail to accept the policy in their business. This in future will therefore make many proprietors and homeowners look after their premises in case the risk occurs. Recent studies have shown that over 40 percent of the value of goods owned by people living near the costal region is lost. This has therefore resulted to these properties losing value and eventually making it uninsurable. According to Andrew (2011) about a million home located near the shore are at a risk and more than 300, 000 businesses located at the same costal region may also not be insured therefore they are prone to floods risk. Some of the parts affected by the flood include London, Brighton, Birmingham, Manchester, Hull etc. The above study discusses the reasons why the UK insurers will no longer insure homes and businesses that are at the risk of being affected by the increased floods in the area. The reason why the UK insurers fail to insure against floods is because of the increased signs of floods for example due to the recent climate change and also due to the high sea level. These are enough factors which show that a flood may happen any time and thus insuring a property will make the insurance companies lose a lot of money to pay their customers. UK insurers however have signed an agreement with the government that they should cover their customers against flood risk since the risk has been properly managed by the government. This contract is to expire in 2013 and soon after businessmen and home owners will have to depend on themselves while faced with the same loss reduce investment funds for the insurers to extend the period of customer cover agreed. Among many countries affected by floods, the UK insurers are one of the few who have agreed to cover flood risk automatically. The Association of British Insurers agreed to input more funds in flood management process and especially to areas that are more affected by floods. According to Gollier (2003) the members of the association also agreed with the government of implementing a long term management strategy that will protect peoples’ property. Risks associated with flood have become very expensive especially to the insurers. This is because claims have tripled from the previous decade where the insurers usually paid about 1.5 billion pounds and currently the claims have tripled to about 4.5 billion pounds. The Department for Environment, Food and Rural Affairs (DEFRA) have also estimated that about 30 percent of the money budgeted is being spent on ways of implementing strategies to reduce flood risk. The organisation has put management of flood as the priority among the many issues facing the environment. Families living in the costal region for example in Essex declare loosing their equity money and at the same time these businessmen and home owners are still struggling to pay premiums to the insurers which have dramatically increased. This has therefore initiated a move by the Essex County Council asking for funds for the construction of a sea wall. This wall is meant to protect property loss of about 40 families located at the costal region. At the same time, the environmental department is still struggling to protect families for example the completion of flood schemes started in 2007 which have now saved more than 150,000 homes and businesses. The environmental agency says than more schemes will be set up to reduce flood risk but they also advice the public to be prepared for this risk at any one time. By being ready mean that businesses and families staying at the coastal region should ensure that they use floor proof properties for example by repairing damaged canoes that would assist them once flood occur. Many families living at floor affected areas say it has been hard for them to resell their houses since the properties have lost value. Wot Blower, a resident at the coastal region declare that her house was rebuilt for one year and this made her premium totally increase for example she was originally paying 150 pounds per month which shoot up to 2,000 pounds after the renewal of the insurance (Andrew 2011). The government on the other hand has warned that the cuts to the management of floods may make many of the house owners unable to insure their houses against the destruction caused by floods. This will be caused by the increased premiums to be introduced by the insurers. The government is now trying to have an agreement with the insurance companies for them to lower their premiums once the government set schemes for preventing the risk. The insurance companies however have do not trust the government in minimizing the losses caused by the risk and there for more insurers fear that homeowners will have to pay for their losses in future. It is therefore important for the government to put enough resources in schemes meant to prevent more people from loosing their properties as it will be awful loosing millions for being unable to pay for the expensive premiums. Some of the methods of getting this schemes completed include; involving powerful individuals in the area who can direct their funds through contribution. This is because it is estimated that one among five houses located especially in England and Wales is at a risk of damaged by the flood. As a strategy for allowing the succession of sandbagging procedures, Floodstop has been introduced by the Emergency Planning Society due to its cost, speed and its effectiveness. Kunreuther (2007) describes that in 2009 the product was voted as one of the most innovative way of managing flood emergencies. The Floodstop barrier has been very useful in preventing flood for example several properties were saved in Brownsea Island using this device. This product protected the Island once it was hit by high tides and the property manager said the system is much better than the use of sand bags. Floodstop is also cheaper and effective since it can be used many times once affected by high tides of flood. Business owners have therefore been advised to make good use of the product in protecting their assets. Risk campaign said that to protect home owners, more strategies have to be introduced. British banks have now started breaking the promise that they made with the government on insuring property against flood. This has resulted to selling business properties and homes at a very low price especially for those who have not insured their properties against the danger. Some property is also lost to the insurance company once the customer can no longer pay for the premium and the above problems have called for a serious campaign. This campaign is called Know Your Flood Risk which has sensitized members to unite in a bid of stopping the damage. Though the government had agreed with the insurers to agree to insure properties at the coastal region, most of the Banks in Britain have refused to renew customers’ insurance policy. According to Kunreuther (2007) it is anticipated that once the contract between the Government and the Association of British Insurers (ABI) expires in 2013, no homeowner will be able to insure against flood and this will force owners undergo huge costs in repairing their properties. Recently the UK Government announced that despite the losses caused by floods since 2007 the government is to cut its funds by 27 percent. This comes after the environmental agency had planned to set up more than 600 schemes between the year 2011 and 2012. In total, among the 1,500 projects that were to be constructed in a bid to prevent damages by floods, the funds to be released by the government will only be able to construct 355 projects. This is barely half of the projects that had initially been planned (Fiona 2010). This reduction of funds for the implementation plan has also made the UK insurers refuse to insure against flood. With the devotion of the Government to reduce funds and save to the economy, statistics have shown that the government saves about 6 pound in every one pound spend on measures of reducing damages caused by flood. Considering that in 2007, the amount spent by the government in repairing over 40,000 homes and about 9,000 business premises was approximately 3 billion pounds, the Government would have spent less in reducing this damage other than spending the money in repairing homes and business premises. This economic climate in UK has also caused reduction of prices in the market which has then caused economic crisis in the entire country. People who have experienced the dangers caused by flood know the consequences that this will cause and that home owners not only risk their properties but also their life is at stake. Dickson (2000, p. 324) shows it is estimated that the total cost spent in repairing a property damaged by flood is about 30,000 pounds which can not be afforded by most home owners. The same home owners also fear that they might spend so much in repairing a property which will then be damaged in the future. It is difficult to believe that proprietors have no one to turn to once they are hit by this risk. The government has cut spending on flood and the insurance companies have refused to offer flood policy. The risk campaign introduced programs that would sensitise proprietors on ways of preventing the risk. The programs offer education services and guide the affected proprietors on the best strategies to employ in preventing their lives as well as their properties. The recent development has been noted where the Government has decided to sell the Thames Barrier and other rivers to a private developer for about 700 million pounds (Fiona 2010). This money is to be used in developing schemes meant to prevent damages caused by flood. However, DEFRA spending on the environment could be reduced by a third of what has been budgeted earlier as a way of reducing Government budget deficit. The private companies operating these assets will exert small charges on consumers benefiting from the assets or consumers will be charged through council tax. It is also estimated by the environmental agency that about half a million families are at risk and the amount of protecting these families is about one billion pounds annually by the year 2035 which amounts to 10 billion pounds spend by the next 10 years. These estimates have initiated a discussion on where to get other new sources of funds. The water companies could do a great improvement in preventing damages. For many years, sandbags have been used as a quick method of responding to flood risk. The method however useful has its disadvantages since it is too costly to maintain for example it Berger et al. (1997, pp. 46-51) describes it is has been estimated that about 78, 000 pounds are used annually on flood protection through sandbags. The sand bags are also ineffective since high tides may sweep away the bags allowing water to pass through. The sand bags are also said to take too much time to assemble therefore more time and money will ne needed to complete the exercise. Sand bags can not be used time and again and therefore every time there is flood more sandbags are assembled. This shows that the amount of money spent by the environmental agency on sandbags is a waste. In 2007 for example no evidence has shown the protection covered by the use of sandbags. Nonetheless, most people consider using sandbags and in order to implement better methods, the use of sandbags and other temporary protection have to be phased out. Conclusion In conclusion, it is difficult to believe that despite the many proprietors who are at the risk of loosing millions of shillings to flood, the UK Government is doing nothing but to reduce funds meant for preventing the damage. Though other temporary methods will be used as short-term defence, In future, the proprietors will be left with no one to turn to once they are hit by this risk since the government will not have completed its schemes and the insurance companies will refused to offer flood policy once the agreement made expires in 2013. References Andrew, M 2011, Firms warn of effect of government spending cuts on planned defences, UK, Harvard University Press. Berger, N., Cummins, J & Weiss, A 1997, The coexistence of multiple distribution systems for financial services, The case of property-liability insurance, Journal of Business, vol. 70, no. 4, pp. 46-51. Dickson, P 2000, The sun insurance office, The history of two and a half centuries of British insurance, London, Oxford University Press, pp. 324 Fiona, H 2010, Leeds flood prevention scheme likely to be lost, London, The Financial Times. Gollier, C 2003, To insure or not to insure? An insurance puzzle, The Geneva papers on risk and insurance theory, New York, Actex Publications. Kunreuther, H 2007, Mitigating disaster losses through insurance, Journal of Risk and Uncertainty, vol. 3, no.7, pp. 68. Read More