Examination of Witnesses (Questions 120
- 139)
WEDNESDAY 5 MAY 2004
MS JANE
MILNE, MR
PETER DOWER
AND MR
SEBASTIAN CATOVSKY
Q120 Chairman: You may not be able
to answer this question straightaway but is there any evidence
that the number of households that are insured comprehensively
to cover the risks we are talking about is increasing, decreasing
or remaining level because the most heart-rending stories are
of the people who live in high flood risk areas who are not well
off enough by their own judgement to afford insurance and end
up being effectively bereft of anything if they are hit by a serious
problem of which the frequency it is suggested might increase?
How are you looking at that scenario?
Ms Milne: Of course there always
have been a small number of properties that have been considered
uninsurable and very often people have bought those at a discounted
price, taking account of that. We do not have any firm figures
but we are undertaking quite a lot of work with members looking
at renewals and whether there are circumstances in which they
feel unable to renew. As you may be aware, the ABI put out a Statement
of Principles about 18 months ago guiding the approach that our
members would take in offering flood cover and since that has
been in place we are not aware of any specific cases but there
may be a handful of cases where there have been repeated events
where they have not been able to renew but it is literally tiny
numbers.
Q121 Chairman: Let me just focus
my question because I gather that from your other evidence. I
am talking generally about people who do not insure their houses.
There are some people who for economic reasons say, "I cannot
afford to insure it", but obviously if they are hit by one
of the problems that we are talking about it is very bad because
they have no recourse to any way of recovering their position,
and I just wondered whether, in terms of the number of UK households
that have a policy, is that going up, down or is it level?
Mr Dower: I do not know.
Q122 Chairman: The reason I ask that
question is that I would imagine that the more people there are
who are insured the more it is spreading the burden of risk over
a greater number of people. Could you have a look at that for
us?
Ms Milne: Yes. We do know that
93% of home owners have house buildings insurance in place. We
are aware that there could be some issues for those on limited
incomes and after all mortgage companies require people to have
insurance in place so most people with mortgages will have this
in place. There may be some people who have paid off their mortgage
and perhaps if they are on a limited pension or something like
that they then feel unable to continue insurance cover. One of
the things that does concern us is that because flood plain sites
are easy to develop there is a disproportionate amount of low
cost housing on flood plains and therefore the very people who
are on limited incomes and living in low cost houses may be disproportionately
exposed to flood risk.
Q123 Mr Drew: Can I be clear in terms
of your own actuarial reports on the impact of climate change:
are you at one with the report that was published last week, even
though that was obviously at the more emotional end of what is
possible? I really wonder what you are being told by your actuaries
because, as much as this may be an opportunity, it is also a huge
challenge to you because if you get this wrong the trust factor
is obviously going to be coming into play. I wonder if you would
say a few things about this. Presumably you are launching your
own research?
Ms Milne: Indeed. We have some
research that we hope to publish in about a month's time on the
whole range of risks that climate change presents to insurers.
I guess the advantage that we have is that we are dealing with
annual contracts here and therefore insurers can tweak those each
year as they deal with things. Our interest in looking across
the longer term is to say that what we decide to offer as cover
in 2080 will largely be dictated by public policy decisions taken
now because houses being built now will still be there and their
owners will want to be insured in 80 years' time, and therefore
our interest in becoming engaged in this debate is to make sure
the right public policy decisions are made now for us to make
the annual contract decisions later this century.
Q124 Mr Drew: That was a general
question. Obviously within this there will be the specifics and
you already have the issue of land which is going to be reclaimed
by the sea. There is such a thing as not being able to get insurance
currently. To some extent you can influence public policy on a
local basis by those sorts of decisions, that this is an uninsurable
risk, or in fact that this is a piece of property which is going
to be so safe because of where it is that you could possibly say,
"We will offer you lower insurance because you are not an
insurance risk in terms of any global warming constraint".
Is that how you will see this series of arguments going?
Ms Milne: As regards coastal erosion
as opposed to coastal flooding, that is not insurable, nor indeed
are those properties mortgageable.
Q125 Mr Drew: That is period, now?
Ms Milne: Yes.
Q126 David Taylor: Are ABI members
making any money on flood protection insurance at the moment generally?
Ms Milne: We look across the household
account as a whole rather than on specific perils.
Q127 David Taylor: You must examine
particular aspects of it to see whether your premiums reflect
risk as presented to you.
Ms Milne: Household cover is offered
as an all-risks cover with a multiplicity of perils covered within
there and from one year to the next you will get a different mixture
of claims, so we tend to look in the aggregate and the position
at the moment is that yes, household insurance as a product is
profitable but it is an intensely competitive market and there
are always new players waiting to come in.
Q128 Mr Drew: Are you saying you
do not examine the various components of risk and claim year by
year? You just look in the aggregate of the claims experience
as opposed to premiums collected?
Mr Dower: Speaking now as an insurer,
yes, we go through that process to look at the adequacy of rating,
so any particular rate will be built up by different perils, by
expenses, by a profit margin, and so on, and we will do that analysis,
yes. In terms of flood, at the moment what we are doing in Zurich
is that as our geographical information gets better with the details
of flood risk right down to geographical co-ordinates, so we are
getting more precise in how we do our pricing but we are in the
middle of all that, as I think most companies are at the moment.
Q129 Mr Drew: You refer in your submission,
and I congratulate you on it, it is excellent, to the Government's
minimum indicative standard of 1.3%, presumably one in 75 years.
Is there ever much debate or controversy about flood risks in
specific areas where some people are maybe talking it up, as the
Chairman said right at the very start of the session, and some
are talking it down? I found in my own area when we were trying
to get the statutory agencies to tackle the impact of recent floods,
and we are not in an area in the Midlands that is particularly
prone to flooding, insurance companies and others were talking
it up and the statutory bodies were looking back over a period
of 200 years and somehow, inaccurately in my view, extrapolating
from that. Surely there must be a clash there somewhere. How do
you resolve those clashes? What is 1.3% risk?
Mr Dower: At the end of the day
we use various data. I can only comment on the Zurich experience.
There are different levels at which pricing will occur. Most of
our business is intermediated and therefore most of our rates
for household insurance will be electronically stored. What the
broker will do is go through the list of premiums per company
for a particular risk and if he comes across Zurich's premium
and beside it it says "Refer" because it is in a postcode
area which has got problems in places, the broker might decide
not to refer and go on to one where it does not say "Refer".
That is at postcode level and postcode level is over a wide area.
When risks are then referred within the Zurich they are looked
at far more closely and if possible, if the information is there,
you get down to risk address and you look for a portfolio of risks
in that particular area. Do different insurers take different
views? Yes, they do, and very often it depends on what their experience
is at the risk address level.
Q130 Chairman: Are you as insurers
making those judgments on your own information? You are not slavishly
sticking, for example, to the Environment Agency's map of flood
risk?
Mr Dower: No. We use the EA data,
we use other databases and we use our own claims database.
Ms Milne: What we have done is
secure this information from the Agency which insurers can use
to decide the relationship they have in terms of offering cover,
but in making their pricing decisions they use all sorts of different
sources of information that they can get hold of, including their
own claims experience.
Q131 David Taylor: Under what conditions
would flood cover become prohibitively expensive? Is this a commercial
decision?
Ms Milne: Yes.
Q132 David Taylor: If you are not
able to make sufficient cover to cover your fixed costs of offering
these policies you will join France and Germany and the rest of
the world in just abandoning the market, will you?
Ms Milne: I think because it has
become so embedded within the household product that is offered
in the UK market it will continue to be offered wherever possible
but it is possible that there will be certain areas in which flooding
becomes so frequent that insurers decide that despite the best
efforts that they might use to work with customers it is no longer
tenable. We are looking at a number of ways of trying to tackle
this, including if there is nothing we can do about the frequency
of flooding is there something we can do about reducing the costs
of flooding by, for example, the householder putting in place
resilience measures such as getting rid of chipboard flooring
and replacing it with solid concrete floors, moving the sockets
higher up the walls so that the electricity does not go down every
time they flood, this sort of thing.
Q133 David Taylor: Is this what you
had in mind in your phrase "provide an acceptable way of
managing the risk"[22]?
Ms Milne: You can come at this
from several angles. Ultimately it may not prove possible despite
all of those best efforts of the policy holder and in terms of
what is done in flood defences. We would like to prevent us from
getting to that stage. We have not put a firm figure on it. Swiss
Re have published a report where they feel that a 10% annual probability
is about the margin of what is insurable.
Q134 David Taylor: So there is a
possibility, to coin a phrase, that the insurance industry would
wade away from those risks?
Ms Milne: Yes. What we have said
under our statement of principles at the moment is that for people
beyond the one in 75 years level, where they are already customers,
insurers will try and work with them to find some of these other
solutions before they get to the point where they say, "I
am sorry but we really cannot continue". We are not saying
it is never going to happen but we are saying we are not going
to switch from, "You have got full cover today" to "Oops,
sorry, we cannot do this any more".
Q135 David Taylor: You used a phrase
at paragraph 11 of your submission which makes me go quite dizzy
and light-headed because I have seen this in a PFI context, that
"there may be pressure on Government to provide an alternative
risk-transfer mechanism". Where that is used in other parts
of Government policy what has been talked about there is that
the group that are allegedly taking the risk then bang it back
to the poor old taxpayer. Is that what you meant, that the poor
old taxpayer has to pay? That presumably would be acceptable to
you.
Ms Milne: There are a number of
different models one could use. We think that the best future
is Government doing what it does best, ie, managing the infrastructure,
and insurers doing what they do best, ie, offering the risk transfer
mechanisms. That is how we would like it to stay, a partnership
between the two of us. As you mentioned, elsewhere other mechanisms
have been tried or there may be specific groups like those on
low incomes where the question is whether there is effective demand
for that insurance because of whether they can afford it or not,
and those are circumstances where Government may wish to take
a view.
Q136 David Taylor: So the Government
becomes compensator of last resort where the industry has walked
away, does it?
Ms Milne: Or an alternative would
be for Government to subsidise premiums in those areas.
Mr Dower: There is an issue about
a social agenda here. Often the insurance industry is somehow
expected to set a social agenda and I am afraid that is not true.
We are in the game to make money the same as any other industry.
It is not for us to say what would the social agenda be, ie, should
the person who lives on a hill pay a flood insurance contribution
for the person who lives in the valley? We set premium on a risk
assessed basis. It is a difficult question to say when a risk
becomes uninsurable. Risks become uninsurable probably when the
policy holder is no longer prepared to pay that level of premium,
but then it is not really for us to say, "That is okay; we
will charge everybody additional premium in order to subsidise
people who live in high risk areas".
Q137 David Taylor: So have you put
these alternative risk transfer mechanisms that have not yet emerged
to Government and, if so, what sort of response have you had so
far?
Ms Milne: What we have been working
with Government very closely on over the last three or four years
is trying to get the risk management techniques right so that
we do not have to invent new risk transfer techniques, so if Government
protects those properties then we can continue to offer the insurance.
That is our preferred approach.
Q138 Chairman: Given that one of
the characteristics of global warming is the unpredictability
of where weather events are going to occur and the ferocity with
which they might occur and previous trends do not necessarily
predict that, just to be absolutely clear. Would you not, for
example, envisage as an industry having some kind of collective
pot to share the burden because of unpredictability where there
might be a global warming levy put on top of all premiums, money
goes into a central pot to be used because of the unpredictable
nature of the events, or are you saying, "No, we have got
enough actuarial experience. We are looking at all the factors.
We would far rather continue to rate individual properties, individual
insureds according to their risk at that location"?
Ms Milne: One of the aspects that
has driven the approach the UK insurance industry has taken on
all of these perils is to avoid moral hazard and essentially if
you price on the risk presented by an individual property then
you build in all the incentives that that property owner may need
in order to do the sensible things to protect themselves. Once
you start looking at pooling arrangements then those incentives
begin to disappear so as an industry in the UK we prefer to avoid
pooling arrangements. We think that risk pricing is the best approach.
Q139 Mr Wiggin: Is it possible to
buy house insurance without flood cover?
Ms Milne: No, not generally. The
standard approach in the UK is to build flood cover in.
22 Ev 33 (para 8) Back
| 
