Memorandum submitted by the Association
of British Insurers (ABI)
The insurance industry has agreed to continue
to provide flood cover for as many homeowners as possible, provided
the Government takes action to reduce the risk of flooding to
homes and business. This includes effective action to address
sewer-flooding problems for all those properties at very high
risk (10% annual probability).
The number of sewer flooding incidents has remained
approximately static at 5,000 to 7,000 properties each year since
1994. According to Ofwat research, more than 60% of customers
affected by sewer flooding in the last three years have been flooded
more than once, and 15% of those flooded due to sewer incapacity
over this period have flooded more than six times.
In its draft determination on the pricing of
water and sewerage services for 2005-10, Ofwat offers support
for 80% of the sewerage improvement schemes put forward by water
companies to alleviate sewer flooding for properties at very high
flood risk. This will still leave at least 4,000 properties exposed
to unacceptably high risk of sewer flooding, and at least 15,000
more at significant risk (5% annual probability). Allowing water
companies to spend £830 million over and above the draft
determination in order to tackle sewer flooding would add an extra
£7.30 to the average customer sewerage bill each year.
The insurance industry would like Ofwat, in
its final determination on water and sewerage prices for the coming
five years, to:
— Work with water companies to ensure
that effective mitigation measures are in place to protect those
remaining 4,000 properties exposed to very high risk of sewer
flooding where a capital scheme is not an economical solution.
— Ensure that some action is taken
to assist those 15,000 properties still facing a significant risk
of sewer flooding.
— Allow water companies to take full
account of climate change and future housing projections in planning
capital schemes to address sewer flooding.
By taking action to tackle sewer flooding today,
flood insurance should remain readily available to the vast majority
of householders in the UK, providing customers with the comfort
that if they do suffer sewer flooding, the financial consequences
at least will be minimised.
1. The Association of British Insurers (ABI)
is the trade association for insurance companies operating in
the UK. It represents over 400 members who, between them, transact
around 95% of UK insurance business. It is estimated that the
insurance industry accounts for 20% of investment in the stock
market.
SEWER FLOODING
AND INSURANCE
2. Sewer flooding is a serious and costly
concern for the insurance industry and its customers. Insurers
wish to provide flood cover to as many homeowners as possible,
but can only continue to do so if flood risk is managed in a sustainable
manner. Where events become too frequent or too costly to repair,
insurance can only be offered at rates that may be considered
uneconomic.
3. The UK insurance market is almost unique
in offering voluntary, comprehensive flood cover as a standard
feature of household policies. The insurance industry is able
to provide this cover on the basis that the Government and other
agencies would take adequate steps to manage flood risk effectively.
On all weather damage claims (flood and storm primarily), insurers
have paid out £6 billion in the last six years, over twice
the amount in the previous period (Figure 1).
4. Since 1994, there have been between 5,000
and 7,000 sewer flooding incidents each year,[8]
with around half occurring because capacity of the system is exceeded.
While the number of properties classified "at risk"
has declined, the number of internal flooding incidents has remained
fairly static. The Government recent Foresight study[9]
calculated that flooding from sewers costs the national economy
£270 million each year on average.
5. Clearly, both the economic and financial
consequences of sewer flooding mean that water companies should
be allowed to take all necessary action to eliminate as many incidents
of sewer flooding as possible.
CONTINUED PROVISION
OF FLOOD
COVER
6. In the severe flooding in Autumn 2000, over
11,000 homes were affected,[10]
and insurers paid out more than £1 billion in meeting weather-related
claims. Around 14% of these properties were flooded with sewerage
(1,500 homes).[11]
7. After Autumn 2000, the Association of
British Insurers (ABI) worked closely with the Government to agree
a Statement of Principles,[12]
setting out terms through which the industry would continue to
provide cover for the vast majority of households in the country.
In the Statement of Principles, the insurance industry agreed
to provide a competitive market for all properties protected to
a standard of 1.3% annual probability of flooding, and to stay
on cover for all those properties that will be protected to this
standard by 2007.
8. This agreement by the insurance industry
is contingent on action by the Government to reduce the risk of
flooding to homes and small businesses in the UK, including the
"implementation of realistic solutions to sewer flooding
including increased investment in improvement programmes".
The insurance industry expects to see water companies take effective
action to address sewer-flooding problems for all those properties
at very high risk (10% annual probability).
9. For properties that remain at high risk
of sewer flooding, multiple incidents over the course of a few
years are likely—for example, Peter Marcic's case to the
House of Lords.[13]
Ofwat's own research[14]
shows that more than 60% of customers affected by sewer flooding
in the last three years have been flooded more than once, and
15% of those flooded due to sewer incapacity over this period
have flooded more than six times.
10. In such high-risk properties, the annual
risk-based premium would approach the full reinstatement costs,
and insurance may no longer be viable. Ofwat's own research shows
84% of those making an insurance claim were still able to obtain
insurance on renewal, but nearly half (46%) could not get competitive
quotes. The insurance market requires good risk management to
operate most effectively.
11. Availability of insurance should not
preclude efforts to reduce the incidence of sewer flooding. Ofwat
research shows that the majority of people who had experienced
sewer flooding not only found it very upsetting but also were
afraid to leave their house for a week or so due to the risk of
a repeat event. Over 90% of those questioned wanted future risk
alleviated, rather than compensation after an incident.
12. When the ABI met with Government Ministers
last year to review the Statement of Principles, Elliot Morley
was sympathetic to the need to reduce the incidence of sewer flooding.
But of course the final decision rests with the regulator, Ofwat.
EFFECTIVE SOLUTIONS
TO TACKLE
SEWER FLOODING
13. Water companies have now submitted their
final business plans to Ofwat. The plans propose costs of an additional
£1.5 billion to maintain and upgrade sewerage infrastructure
over the 2005-10 period. This increased expenditure is essential
to minimise service failure, safeguard public health, and ensure
that financial protection against sewer flooding can continue
to be provided.
14. The outcome of Ofwat's draft determinations[15]
published in August 2004 are summarised in Table 1.
15. The ABI is pleased that Ofwat has recognised
the particular problems of sewer flooding and agreed funding sufficient
to address 8,200 cases with the highest risk of flooding (10%
annual probability)—that is 80% of proposals set out in
water company final business plans. But after these properties
are dealt with, at least 4,000 properties will remain at very
high risk of sewer flooding, and 15,000 more properties at significant
risk (5% annual probability). Allowing water companies to spend
£830 million over and above the draft determination in order
to tackle sewer flooding would add an extra £7.30 to the
average customer sewerage bill each year.
16. For these properties, Ofwat has determined
that a capital solution would cost more than £120,000 per
property protected by the scheme. According to water companies
themselves, applying a simple cost cap would disadvantage those
properties at most severe risk, because capital solutions for
those properties that have already flooded more than once would
often exceed the £120,000 cap. Therefore, it is important
that Ofwat encourages water companies to find cost-effective solutions
to mitigate sewer flooding for these remaining properties, potentially
most at risk.
17. In the Ofwat draft determination, some
water companies have been allowed to adopt mitigation measures
that reduce the consequences of sewer flooding, eg back-flow valves,
door-boards. In setting price limits, Ofwat should ensure that
all water companies who will not be able to remove properties
from a 10% annual risk of sewer flooding through a capital scheme
have sufficient resource to use flood-resilient measures to mitigate
the impacts of sewer flooding.
18. In addition, the ABI would like further
clarity in the final determination addressing:
— why projections in the number of
emerging sewer flooding problems differ between the two water
companies with the greatest number of properties at risk (Thames
and Severn Trent) and Ofwat figures;
— how water companies can begin to
identify solutions for the additional 15,000 properties facing
significant risk from sewer flooding (5% annual probability);
and
— to what degree water companies are
able to take account of climate change and future housing projections
in developing solutions (capital or otherwise) to address sewer
flooding. This final point in considered further in the next section.
ADDITIONAL RISKS—CLIMATE
CHANGE AND
NEW DEVELOPMENTS
19. Sewers are typically only designed to
deal with relatively common rainfall events (3-4% annual probability),
compared with river or coastal defences that protect against less
common events (0.5-1%).
20. Without taking action early, sewer flooding
problems are likely to get worse, as climate change and pressures
for new homes increase the amount of water running off the land
and into the drainage system. The long lifetime of sewerage systems
means that we need to start preparing today for the impacts of
climate change and new development plans.
21. Water companies should be able to include
an allowance for climate change in the costs of any new capital
scheme. New sewers should ideally be designed with sufficient
capacity to cope with the increased heavy rainfall we will experience
as a result of climate change.
22. Climate change scenarios show that it
is not just the quantity of rainfall but also its intensity that
will increase in the future, perhaps by up to 20%.[16]
This will increase the risk of urban flash-flooding, as present-day
extremes of rainfall that exceed the capacity of sewers will occur
more frequently. Research projects such as UKWIR's work on climate
change and the EPSRC-funded Audacious project[17]
will provide helpful guidance on design criteria for new systems.
23. According to the Government's recent
Foresight study[18],
the number of properties at high risk of localised flooding could
increase four-fold by the end of the century. Average annual damages
from sewer and drainage flooding could increase from £270
million to £2 billion-£15 billion, unless we start to
take action today. Damages due to climate change could be minimised
with investments of £110 million-£400 million per year,
but only under the lowest carbon emissions scenarios. Damages
still increased by 10 to 15-fold under the higher emissions scenarios.
24. Building a climate change factor into
infrastructure projects is most cost-effective at the start of
a project or during a major renovation. New sewers should be designed
with sufficient capacity to cope with the increased heavy rainfall
we will experience as a result of climate change. Research projects
such as UKWIR's work on climate change and the EPSRC-funded Audacious
project[19]
will provide helpful guidance on design criteria for new systems.
25. New developments will place even greater
strain on the sewerage system, particularly in combination with
the impacts of climate change. Housing increases hardened surfaces,
and extends the area of impermeable ground. High-density developments,
as proposed in the Government's Communities Plan[20],
could potentially suffer serious water run-off issues, unless
drainage issues are fully considered and the supporting infrastructure
upgraded.
SOCIAL EXCLUSION
AND COMPENSATION
FOR FLOODING
DAMAGE
26. Ofwat's customer research on sewer flooding[21]
suggests that disproportionately more customers aged 65 and over
(36% compared to expected 28%) have experienced an internal sewer-flooding
incident, perhaps due to the age of the property.
27. Although household insurance has risen
in recent years in line with the Retail Price Index (Figure 2),
ABI's own research has shown that 50% of households in the lowest
income decile do not have contents insurance, often because other
household costs leave no margin for "voluntary" charges
such as insurance premiums. Poorer households facing higher sewer
flood risk, and therefore higher risk-based premiums, could face
particular difficulties in securing financial protection and face
breaching their mortgage conditions.
28. In considering future investment needs,
the ABI would support any approach that took into account social
and financial exclusion concerns. The ABI actively promotes measures
to extend the availability and affordability of financial protection
products to the most vulnerable groups in society, such as "Insurance
with rent" schemes, offering affordable homes contents cover
to tenants of social housing.
29. The ABI supports Ofwat's work in reviewing
the compensation arrangements for customers affected by sewer
flooding.[22]
Insurance is the most effective mechanism for ensuring that customers
are fully remunerated after a sewer-flooding incidence (provided
the risk is managed). This process should be treated separately
from the issue of compensation for the distress caused by sewer
flooding, or financial assistance for vulnerable households where
other factors, such as poor health, confinement, and fuel poverty,
exacerbate the problems caused by such events.
30. The number of sewer flooding incidents has
remained static at 5,000 to 7,000 properties each year since 1994.
More than 60% of customers affected by sewer flooding in the last
three years have been flooded more than once, and 15% of those
flooded due to sewer incapacity over this period have flooded
more than six times. The situation could become even worse in
the future, as the impacts of climate change and increased housing
development add further strain to the capacity of our ageing sewer
systems.
31. As part of the ABI's Statement of Principles,
the Government has agreed to examine solutions to reduce sewer
flooding, including increased investment in the sewerage infrastructure.
32. The ABI is pleased that Ofwat has recognised
the particular problems of sewer flooding and agreed funding sufficient
to address 8,200 cases with the highest risk of flooding (10%
annual probability)—that is 80% of proposals set out in
water company final business plans. However, the ABI remains concerned
that, after these properties are dealt with, at least 4,000 properties
will remain at very high risk of sewer flooding (10% annual probability).
Many of these properties are likely to flood several times more
in coming years.
33. The ABI would urge Ofwat to do all it
can through the periodic review of price limits to enable water
companies to find cost-effective remedies to sewer flooding for
properties with existing or emerging problems. By taking action
to tackle sewer flooding today, flood insurance should remain
readily available to the vast majority of householders in the
UK, providing customers with the comfort that if they do suffer
sewer flooding, the financial consequences at least will be minimised.
24 September 2004
8 Out of sight-not out of mind: Ofwat and the public
sewer network in England and Wales, National Audit Office, January
2004, http://www.nao.org.uk/publications/nao-reports/03-04/0304161.pdf Back
9
Future Flooding, Office of Science and Technology Foresight Programme,
April 2004, http://www.foresight.gov.uk/fcd.html Back
10
Autumn 2000 floods in England and Wales-assessment of national
economic and financial fosses, Middlesex University Flood Hazard
Research Centre, 2002. Back
11
Lessons learned-Autumn 2000 floods, Environment Agency, March
2001, http://www.environment-agency.gov.uk/commondata/105385/126637 Back
12
ABI Statement of Principles on the provision of flood cover,
Association of British Insurers, September 2002, http://www.abi.org.uk/Display/File/Child/228/Statement.pdf Back
13
Judgments-Marcic (Respondent) v. Thames Water Utilities Limited
(Appellants), House of Lords, December 2003, http://www.parliament.the-stationery-office.co.uk/pa/ld200304/ldjudgmt/jd031204/marcic-1.htm Back
14
Customer research 2004: survey of customers affected by sewer
flooding, Ofwat, August 2004, http://www.ofwat.gov.uk/aptrix/ofwat/publish.nsf/AttachmentsByTitle/rd1504-sewerflooding.pdf/$FILE/rd1504-sewerflooding.pdf Back
15
Future water and sewerage charges 2005-2010: draft determinations,
Ofwat, August 2004, http://www.ofwat.gov.uk/aptrix/ofwat/publish.nsf/Content/pr04DD-Full Back
16
Climate change scenarios for the United Kingdom, UK Climate Impacts
Programme, April 2002, http://www.ukcip.org.uk/scenarios Back
17
http://www.eng.brad.ac.uk/audacious Back
18
Future Flooding, Office of Science and Technology Foresight Programme,
April 2004, http://www.foresight.gov.uk/fcd.html Back
19
http://www.eng.brad.ac.uk/audacious Back
20
Sustainable communities: building for the future, Office of the
Deputy Prime Minister, February 2003, http://www.odpm.gov.uk/stellent/groups/odpm_communities/documents/page/odpm_comm_023261.hcsp Back
21
Customer research 2004: survey of customers affected by sewer
flooding, Ofwat, August 2004, http://www.ofwat.gov.uk/aptrix/ofwat/publish.nsf/AttachmentsByTitle/rd1504_sewerflooding.pdf/$FILE/rd1504_sewerflooding.pdf Back
22
Out of sight-not out of mind: Ofwat and the public sewer network
in England and Wales, Committee of Public Accounts, July 2004,
http://www.publications.parliament.uk/pa/cm200304/cmselect/cmpubacc/463/463.pdf Back
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