Flooding : An insurance perspective

1. Flooding : An insurance perspective

2. Weather or not?

3. What if your insurer’s office is flooded? • Insurers preach best risk management practice, particularly to their commercial policyholders, issuing guides and a wide range of other articles for them aimed at loss prevention and damage minimisation. Their surveyors also make recommendations. This not only assists their policyholders, but is in the insurer’s self-interest as well. • But do they practice what they preach? • Part of AXA’s office in Ipswich is currently within the area, shown on the Environment Agency Flood Map, that would suffer in the event of a major flood (prior to completion of the planned Ipswich tidal barrier in March 2016 ).

4. What if your insurer’s office is flooded? • AXA assure us they are very well prepared. They inform us;- • “We take Business Continuity very seriously and have a dedicated Team who look after this as well as running scenarios, stress tests & other exercises. We have a telephone & email cascade to all staff which ensures we can communicate to all effected in the event of some emergency. We test this regularly! • We have run various exercises, both with the ABI (who chose a national disaster scenario in which coincidentally Ipswich was flooded!), and ourselves, looking at the different key sites that we have. As well as flooding we have run tests around terrorist attacks, bomb scares & widespread electricity failure.  • We actually take in to account the need for business continuity when looking at our site strategy, having all staff in one place might bring some cost efficiencies, but could end up with huge problems if that area is affected. Many of our staff can work from home with laptops & mobile phones, but we also have contingency plans which see work & staff relocated to different offices (Ipswich to Haverhill for instance, Bolton to Lytham) & can easily redirect calls to anywhere in the UK” 

5. What if your insurer’s office is flooded? • “We have 5 claims sites in the UK & 11 Branches, & cross train 'sleeper cells' of people in other locations just in case.  • We also have arrangements for additional emergency 'seats' in various locations around the country that we pay a small holding fee for. There are firms dedicated to providing this facility). We cold also use AXA staff overseas if necessary (such as India) but try to avoid this for customer facing work.  • We take our responsibilities to customers very seriously, as well as FSA regulations which mean we have to provide continuity of service we simply wouldn't want the reputational damage that not being able to provide good service would bring.” •  We would expect other major insurers to have similar BCPs

6. But what if they are inundated with flood claims? • We approached three leading insurers. • Allianz assured us they could respond, but did not provide any detail except to say;- • “To deal with the aftermath of flooding, we feel ...Loss Adjusters would be a better source of information as they will have had first hand knowledge of these situations.” • Aviva were more forthcoming. Here are extracts from their detailed reply;- • “We have a Major Incident Response Plan (MIRP) in place which is updated following every event, and details who does what during various possible types of event (Storm, Flood Freeze etc) • It includes coordinated activity in the centre of excellence, and in the field – as well as the reinsurance, media and other activity.”

7. But what if they are inundated with flood claims? • “We test our Major Incident Response Plans with our own operational teams and suppliers ahead of every winter with scenarios based on previous events. This includes simulation to review the capacity that would be available in the event of different types of catastrophes. • We get early warning of weather events from a partner called Euro Tempest, up to a week ahead of bad weather. These warnings are then tracked in real time as the event gets closer. The exposure we have is mapped against the predicted weather so that we have very accurate predictions of how many claims we will get and where, and this allows us to plan very specifically for the likely outcome • We put extra resource in place across our claims system including our Centre of Excellence, our in-house buildings validation & fulfilment team, and in our Supply Chain. Having our own field force of over 150 surveyors and contract managers gives us a very visible and flexible resource on the ground in any event • NB - our call centre staff are available 24 hours a day every day of the year, including Christmas Day and New Year, as we are always open (regardless of the weather)”

8. But what if they are inundated with flood claims? • “During a serious event everyone takes a pre-determined role to ensure absolute focus on key areas such as overall coordination & prioritisation, media relations, reinsurance, communication, stakeholder management, MI reporting, supplier response etc. • Regular calls are held during an event to review demand and respond capability, and to agree real time actions. These are led by our Head Of MIRP and can be as often as 4 times a day if events are fast moving • We put extra resource in place across our claims system, including our centres of excellence, field force, supply chain and loss adjusters according to predicted and then real demand • Presence on the ground: for example we had loss adjusters out in St Asaph within hours, personally visiting all customers on our flood mapping 'at risk' list • Our teams have autonomy to ‘cash’ small claims  and establish if invoices are reasonable for the work undertaken through the “insured’s own builder“ process.”

9. But what if they are inundated with flood claims • “Alternative Accommodation is arranged as fast as possible for those whose homes are severely damaged and emergency payments made to buy essentials if they have been lost or ruined by dirty flood water (drying equipment and repairs are organised once the water has receded) • Communication plan invoked including social media, web, internal, external and media/adverts etc. • In the past we have also; • Purchased mobile kitchens to allow customers to remain in the upper floors of their property whilst the downstairs was being repaired. • Transferred our Builder Network resource from non-affected areas to flood areas • Put a mobile claims advice centre in the area • Utilised our Loss Adjuster presence with use of their overseas Adjusters • Deployed our claims handlers and mobile IT to Loss Adjuster offices to support and make payments • Used Loss Adjuster managed builder networks to meet demand on large losses • Used local builders, where appropriate, project managed by Loss Adjusters”

10. But what if they are inundated with flood claims? • We think it fair to say Aviva are well positioned to deal with a major flood event. • And AXA? • “We have something we call our MCCP – Multi Claims Contingency Plan & it is incredibly detailed, site & type of claim specific & describes precisely how we will respond. This actually gets tested quite regularly, if you think back to 2007 when we had 2 x 1 in a 100 year events within the space of a couple of months, & then when Cumbria was hit, the old AXA / Provincial heritage meant we had something like a 30% Market share! • We tend to keep classes of business separate as different skills are needed, 2 variations to that however in that we do cross train people in other classes of business for these sorts of eventualities, including training Non Claims people to at least take first notification of loss calls so that the claims people can concentrate on the complicated stuff. “

11. But what if they are inundated with flood claims? • “The other exception is we do use Geocoding software to establish where our policyholders are even before we have received any notification from them, we will give a list to Loss Adjusters & ask them to visit when dealing with other claims in the area.” • “Provision of drying & other equipment has not been an issue for us, we are a large company and as such can command good contracts with suppliers, & if enough not immediately available from the UK have brought stuff in from overseas. Similarly our contracts with Loss Adjusters & other contractors have ‘Surge’ conditions built in to them. • We would set up hot lines, as well as putting as much information on line as we can. We have also sent teams in to affected areas, either utilising a friendly brokers office, or mobile accommodation.”

12. But what if they are inundated with flood claims? • “Alternative accommodation can be a real issue, dependant on where the vent is, B&B’s, Hotels & Rental Properties can be snapped up very quickly. We have arrangements with Countrywide & other similar firms to rapidly source suitable properties, although many people do like to stay as near as possible or even ‘on’ their damaged properties, which is when Caravans can actually become the vehicle of choice.” • Less detailed than Aviva but, in fairness, AXA advise their Multi Claims Contingency Plan has too much personal and confidential information to share with us. Like Aviva we believe AXA are well positioned to deal with a major flood event.

13. The Weather vs Government vs Insurers v The People (or any permutation thereof) • Some basic fact .....and opinions. • Insurance is not a charity. It is a business, with shareholders demanding a return. • Flood insurance has been readily available in the UK, for all but the most extreme risks, for at least 100 years. (It isn’t offered as standard in many other countries). • Banks and Building Societies require flood cover to be in place for a mortgage to be offered. Flood cover must be maintained or the borrower may be in breach of the lender’s terms. • Without flood cover the market value of a property will fall substantially, and may become almost worthless as no one else will be able to secure a mortgage to buy it. Financial institutions therefore rely on insurers to readily provide affordable cover. • People buy insurance for peace of mind. They expect their insurer to treat them fairly – but does this mean the insurer must continue to provide flood cover in any circumstance, and at what cost?

14. The Weather vs Government vs Insurers v The People (or any permutation thereof) • Many people don’t feel they should subsidise someone else who is a higher risk, unless it is they who find themselves to be a high risk – perhaps through no fault of their own. • Some people think insurers are rogues, always looking to avoid claims or claw back claims payments through higher premiums in future years. • People vote, or at least will write to their MP. • Everyone is ready to blame the Government or Local Authorities. They are the ones permitting building in (allegedly) flood prone areas. • But we need more houses built. As long as my house value doesn’t go down, or I lose my view. Oh, and we want to avoid urban sprawl into the countryside.

15. The Weather vs Government vs Insurers v The People (or any permutation thereof) • And the weather is changing • Sea levels are also rising • Insurance underwriting is based on historical data allied to knowledge of any risk proposed to them. But if you experience 2 x “1 in a 100 year” events close together your figures tend to go out of the window. If there seems to be no reasonable chance of making a profit, at least until weather patterns have stabilised (and who knows when that will be) then why bother trading? Why not look elsewhere at more profitable areas of risk?

16. The Statement of Principles • Insurers became concerned at increasing flood losses, mainly due to changing weather patterns coupled with development on “unsuitable” sites in the late 1990s. In 2000 flood losses reached £1billion. • Rather than simply price each risk on its merits (which would have made cover unaffordable for around 200,000 properties deemed high-risk) insurers, who were members of the ABI, agreed with the Government in 2000 to a Statement of Principles. Under this insurers guaranteed continuance of cover for all existing properties. The premiums of properties not in high risk areas would subsidise, in part, those at greater risk. The Government agreed to improve flood defences, aiming for a 1 in 75 year protection. This agreement expires in June 2013. No new agreement has been reached. • The 2007 flood bill for insurers reached £3 billion • 2012’s bill is currently estimated at £1.2 billion • Properties built since 2009 are excluded.

17. The Statement of Principles • Insurers new to the UK market, or at least new to household cover, are outside the agreement (it is not a statutory arrangement) and so are free to pick and choose the good risks whilst avoiding the bad ones. This will ultimately give them a price advantage if nothing changes, leaving the SoP insurers with fewer good risks and all the bad ones. Something will have to give. • The Government gave its undertaking when its coffers were in good order. They no longer are. Some flood defence improvements have been made but weather patterns are, if anything, becoming more extreme. • What happens next? No one currently knows for certain. • Two alternative projects have been offered by parts of the insurance industry, Project Noah and Flood Re. The former has been recently rejected by the ABI. • Flood Re is a not-for-profit reinsurance facility which all insurers could access. The cost to insurers of Flood Re premiums would then be spread across all policyholders. However in its early years Flood Re might find claims exceed premiums. An insolvent reinsurer is not permitted by the FSA so the Government may be asked to acts as “insurer of last resort” i.e. the taxpayer becomes the insurer. The Government appear reluctant to do so.

18. The Statement of Principles • Some facts in the meantime from AXA (November 2010 report) • AXA insure 22,000 homes deemed at high risk of flood in the UK (just over 10% of the total). • The premium for these 22,000 is subsidised by £11.3M - an average of £511 each • Their “technical” price (aka the price they would normally quote in the absence of the SoP) is being subsidised by 58% i.e. a customer pays only 42% of the true flood risk premium. • Every AXA non-high risk policyholder is subsidising the high risk ones by £12.65, or about 5% of the typical household premium. • 24% of the high risk properties are subsidised by over £1000.

19. And now for something ...also about flooding • It’s not always a river bursting its banks that causes flooding. Most flood claims are from surface water run-off. (AXA quote that in 2007 75% of its flood claims were not in DEFRA High Risk areas.) “Poor planning and building in the wrong place” are cited. • Planners, please consider the impact of a large, out of town, business park or shopping development (or park and ride). These usually require large areas of car parking and other hard-standing areas. Can the drainage system cope? • The following case study explains.

20. Flooding due to over-development ?

21. The Bigger Picture