House of Commons - Environmental Audit

Select Committee on Environmental Audit Written Evidence

Memorandum submitted by the Association of British Insurers

The Government's plans to enable developers to respond to demands for housing should take account of long-term risks, such as flooding and climate change. Design and planning of new developments should incorporate risk avoidance and risk management measures, so that effective financial protection can continue to be offered to residents and businesses.

The Government should strengthen its policy framework for safeguarding the long-term viability and sustainability of new housing, including:

— Incorporating resilience to flooding and other risks (eg fire, windstorm) into the Code for Sustainable Buildings, taking account of current and future climate.

— Establishing an effective and fast-track system-build standard (LPS2020) that confirms the insurability and mortgageability of new developments using modern methods of construction.

— Ensuring that the planning system is responsive to the full range of market signals, including the availability and cost of insurance, so that new developments are targeted on the lowest risk sites and avoid those at highest risk (eg low lying parts of the floodplain).

Only by putting in place a strong policy framework can the Government ensure that it delivers truly sustainable communities today and for the foreseeable future.

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 94% of UK insurance business.

ROLE OF INSURANCE IN SUSTAINABLE HOUSING

2. Kate Barker's report to the Government in March 2004[1] highlighted the depth of the housing shortage in this country, and the knock-on effect for spiralling house prices. House-building rates would need to almost double from 140,000 to 260,000 a year to stabilise increases in real house prices at 1.1%—in line with average EU levels.

3. The Government responded to this challenge by proposing a set of policies in "Sustainable communities: homes for all" to deliver over 1.1 million new homes in the South-East by 2016.[2] These new homes will play a key role in sustaining economic stability and promoting social inclusion in the poorest communities.

4. The insurance industry is central to the operation of the UK housing market. Lenders will usually only offer a mortgage on a property with adequate building insurance. As a result, insurers have a strong interest in a thriving and sustainable housing market.

5. In today's competitive UK insurance market, insurers are increasingly using an assessment of risk to price their products, particularly as reinsurers are placing greater emphasis on this approach. If the risks to new developments are not managed for the future, affordable financial protection may not be readily available.

6. Sustainability should be a central consideration for any large-scale plans for re-development. New infrastructure is typically designed to be in place for many decades, and so planners should always take a long-term view. Infrastructure decisions leave a substantial legacy. The built environment turns over at a rate of around 1% each year, and so is slow to respond to external factors.

7. The built environment should offer protection for the whole population, including those most at risk. Socially deprived households are up to 5 times more likely to suffer a burglary, 31 times more likely to suffer a domestic fire and 16 times more likely to die in a fire than households in general.[3] There are a number of factors associated with low incomes that increase the risk of fire. These risks should be addressed at the design stage of a housing development to ensure that the UK building stock addresses the needs of all potential occupants.

8. These aspects of sustainability have not been fully addressed in the Government's plans to date. The Government should strengthen its policy framework for safeguarding the long-term viability and sustainability of new housing. This paper highlights some key areas where further action is urgently needed to deliver truly sustainable communities.

CODE FOR SUSTAINABLE BUILDINGS

9. Developments should be resilient to natural and man-made hazards, such as flooding, fire, windstorm and driving rain, if they are to be considered truly sustainable. The costs of weather damage and subsequent repair will be reduced if developments are designed and constructed to be resilient.

10. Climate change is likely to increase the frequency of damaging weather events, making it even more important that resilience is incorporated into the design and construction of new buildings. Buildings constructed today will typically still be in place in coming decades when the impacts of climate change are felt more intensely. Storm and flood losses have totalled over £6 billion over the past seven years (Figure 1). Insurance claims due to severe weather could treble by the middle of the century unless action is taken to improve the resilience of new building stock.[4]

11. Flood resilience, in particular, could be a key feature of flagship developments in locations, such as Thames Gateway, where many of the new homes will be built in the floodplain. [5]Resilience does not have to cost much more, provided it is designed into the development at an early stage.

12. The Government already has comprehensive guidance on making buildings resilient to flooding.[6] The ABI has also published its own factsheet on ways that homeowners can limit the damage caused by floodwater once it enters a property,[7] eg concrete floors, lime-based plaster, electrical sockets and service meters located above the likely flood level. The report examines the additional cost of installing flood resilient measures during renovation against the costs saved the next time the property floods. All the measures highlighted pay for themselves after a single flood when retro-fitted. Norwich Union estimates that cost of repairs to a house could be reduced from £49,000 to as little as £8,500 with installation of flood-proof measures. Many of these measures are significantly cheaper when included in designs for new-build.

13. In a similar way to locating new developments away from high-risk sites, the resilience of buildings can only be assured through changes in regulation. Currently, the building regulations are primarily concerned with health and safety issues, although this has been broadened recently with the introduction of energy efficiency standards for buildings.

14. The ABI would like to see the Code for Sustainable Buildings to consider issues of resilience and durability. There should be a minimum level of durability for all new homes to ensure that damage and repair costs do not escalate over time, so that maintenance of buildings is affordable and sustainable over their lifetime. A move towards low-quality housing could mean higher insurance costs, if insurers believe the risks and costs of damage to be increasing.

15. The Code for Sustainable Buildings offers an opportunity to bring many sustainability issues together in one clear place. House builders have welcomed strong signals from Government about the key components of sustainability that should be incorporated into new developments. But they have argued that they are suffering from "checklist overload", and would like to see a single product that consolidates the range of initiatives currently on the market.

MODERN METHODS OF CONSTRUCTION

16. Innovative construction techniques offer a key mechanism to speed up rates of house-building and reduce costs. The Housing Corporation and English Partnerships both have targets that at least 25% of grant-funded homes from 2004 will be built using modern methods of construction.

17. However, this approach could prove to be a double-edged sword. As with all new technological approaches, there are some risks and uncertainties that need to be carefully managed.

18. For developers, off-site modular homes have the potential to offer considerable time and cost savings during construction, because modern methods of construction can reduce project time. Individual components may also be imported from outside the UK at cheaper prices. But it is important that we understand more about the longevity of homes constructed using modern methods, and their resilience to flooding and other hazards in the long-term.

19. Information on risks to properties built using modern methods of construction is currently anecdotal. Insurers need to understand risks to make cover readily available. Given their well-established claims profile, conventional-build properties will be the benchmark against which innovative construction techniques such as MMC will be judged. To qualify for insurance under normal terms, properties built using modern methods of construction should show equivalent performance to conventional build against a range of common risks—both in terms of the frequency or size of damage, and the cost of repair across the lifetime of the building. The ABI is currently undertaking research to support these assessments at the generic level but the construction industry and government need to supply relevant information on individual systems.

20. Insurers and lenders have been supporting development of BRE's independent standard for modern methods of construction (LPS2020), in order to provide recognised reassurance on designs that we have little experience of in the UK. This scheme and others like it (ie third party accreditation) could provide a market mechanism for dealing with these new risks.

PLANNING AND MARKET SIGNALS

21. The ABI supports a market-led approach to planning new housing, but a full range of market indicators should be explicitly considered, eg availability and cost of insurance. House prices will not be the only guide to the health of the housing market in a particular area. Insurance underpins the housing market, because most mortgage lenders will not advance a mortgage on a property unless adequate insurance is in place.

22. In the UK, insurers are increasingly using an assessment of risk to price their products.[8] The availability and cost of insurance will be driven by local risk factors, for example flooding, fire incidence, subsidence risk, and crime rates. All these factors should be taken into account when planning the location of new housing.

23. Take-up rates of insurance will also be affected by the degree of social exclusion. Of the population in England living within the tidal floodplain, those in the most deprived income groups were eight times more likely to be living in the tidal floodplain than those from the least deprived.[9] Similarly, smoke alarm ownership is lowest among those most at risk of fire. ONS Family Expenditure Survey shows that Household insurance penetration is lowest in the lowest income decile—half of these households have no insurance cover. Thus not only are these sections of the community most at risk of fire or flooding, but the consequences of a fire or flood are likely to be more damaging and longer-term.

24. The insurance implications of new developments or large-scale regeneration projects should be considered at the planning stage. Local authorities should prioritise lower risk land for development, including areas of lower risk from flooding, subsidence. Local rates of fire and crime should also be considered in the risk assessment. Land exposed to higher risks should be avoided for new development, or certainly not targeted for lower income groups. These groups have less ability to pay for insurance products, and housing in a higher risk location will create another barrier to insurance protection.

25. Lack of insurance will ultimately affect the marketability of the development, since lenders are unlikely to offer mortgages on properties that cannot obtain buildings insurance. Where flood protection does not fully meet insurers' requirements and insurance is more expensive, the value of properties may be affected and mortgages will be more difficult to obtain.

PLANNING AND FLOOD RISK

26. ABI research has shown that flood risk for the new housing developments in the Government's growth areas could be substantial (£55 million per year, or 5% of national flood risk). Careful land-use planning could halve these costs by avoiding the highest risk sites. Insurance may not be readily available for new developments in the most vulnerable parts of the floodplain.

27. ABI research into the Government's housing growth areas shows that good planning is the most effective way to minimise flooding and climate change risks. (Figure 2).[10]

— Moving properties off the floodplain, using non-floodplain parts of development sites, reduced flood risk by up to 96% for all growth areas except Thames Gateway.

— In Thames Gateway, where much of the land targeted for development lies in the floodplain, a sequential approach that allocates housing to the lowest risks parts of the floodplain could halve flood losses.

28. The Government must strengthen its Planning Policy for floodplains (PPG25). The sequential test set out in PPG25 is a powerful planning tool in minimising the impacts of flooding, but it has not been used consistently in drawing up local development plans.

29. Local authorities need to be encouraged to minimise flood risk by avoiding development on the floodplain. Essential infrastructure (hospitals, fire stations, power sub-stations) and vulnerable occupants (care homes, hospices) should be located in the safest and most readily accessible areas. Where there really is no alternative outside the floodplain, development should be allocated to the lowest risk areas first. These principles apply even in well-defended parts of the floodplain—low-lying land should be avoided where possible.

CONCLUSION

30. The insurance industry has an active role to play in working with the Government to solve the housing shortage in this country. If long-term considerations, such as flooding and climate change, are incorporated into the plans at an early stage, creating truly sustainable communities can be a very real goal.