Today, Taoiseach Enda Kenny is meeting with insurance companies over the refusal of companies to insure homeowners who have been flooded. The latest Claire Byrne Live / Amárach poll suggests that a levy on premiums would not be a popular move with the electorate. Caeva O’Callaghan, of O’Callaghan Insurances, a third-generation family broker, looks at how other countries deal with this problem.
PRIOR TO 1950, flood insurance in the United States was part of the standard home insurance policy. During the 1950s, following large numbers of flood events and the subsequent insurance claims, insurance companies started to exclude flood cover from their policies.
As a result, the costs of floods were borne by the homeowners, many of whom could not afford such high disaster costs. Sounds familiar?
In 1968, the US Congress established the National Flood Insurance Program, under which property owners could buy insurance from the US Government to cover losses from flooding.
The intention was to reduce the overall costs of flooding by incentivising communities to manage flood risk and to pool flood risks nationally. The scheme is not without its faults – it was $24 billion in debt at the beginning of 2014 – but at least the scheme exists.
On this side of the Atlantic, the UK Government formally addressed the problem of flood insurance for homeowners back in 2000. The British insurance industry subsidises homeowners living in flood prone areas by providing flood cover at affordable prices. The UK Government committed itself to invest in flood defences.
Today, the insurance industry is claiming that there has not been enough government investment in flood defences; that accelerating climate change has caused a higher frequency of weather-related events; and that there has been too much inappropriate development (effectively, cement covering permeable soil.)
The UK scheme was due to expire in 2013, which would have left over 200,000 homes facing unaffordable premiums (in excess of £30,000), or being refused flood cover altogether. The scheme was extended and a new scheme, Flood-Re, is to be introduced in April 2016.
Flood-Re might just work. All homes will be insured by general insurance companies that operate in the UK and that offer home insurance. Homes with low and medium risk of flooding will be fully insured against flooding by whichever insurance company the home- owner chooses. To ensure affordability, the premium will be determined by council tax bands – allowing low income homes a better opportunity to pay for their insurance.
In other words, low and medium risk homes will be subject to normal free market conditions.
The flood element of high-risk homes is covered by Flood-Re, which will be funded by a levy (tax) of £10.50 on all home insurance policies at their renewal dates. Any catastrophic flood events will be covered by Flood-Re’s own reinsurance policy. It is expected (somewhat optimistically, I would suggest) that within 20-25 years, this scheme will break even.
Naturally, the success of Flood-Re depends on three factors: the UK Government continuing to invest in flood defences, good planning decisions, and no worsening of weather events.
What can work in Ireland?
Could either of the US or UK models work in Ireland? I am convinced that they could, but this would take time to implement. The Americans have a fifty-year head-start, and the British fifteen years.
While a major cause of Ireland’s flood insurance problems lie with poor planning decisions, not all the blame can be placed on the planners’ doorstep. For too long, local politicians were able to overrule planners using a Section 4 Notice. A Section 4 Notice enabled elected
Councillors where Planning Permission had been rejected by the Planners, to over-rule the Planners and force the Permission through. Thankfully thispractise has been discontinued and although this is no longer possible, far too many people now live in houses that are – and always will be – prone to flooding. Ardee Road in Dundalk is a prime example of this practice.
Planning permission was denied by Planners, but they were overruled by local politicians. The houses built there are now under water. Similar stories happened across Ireland.
For the very first time, on January 12, 2016, the Taoiseach is due to meet the insurance industry in Ireland to formally discuss flood insurance.
One government proposal is to impose yet another levy on insurance premiums. Irish consumers are already paying 5% tax on every general insurance premium, reaching a total of €67 million in 2013.
The Irish insurance industry is very much against this proposal, since it effectively means increasing the cost of insurance for consumers.
However, I wonder if the opposition of Irish homeowners to paying a further tax on their home insurance policies would be so great if the government were to promise to ring-fence the extra insurance premiums in a fully transparent fund that was to be disbursed to flood victims?
As an insurance broker and as a member of the insurance industry, I can understand the reluctance of insurers to take on flood cover. On the other hand, if the Government were to come up with a robust plan that answered the insurance implications of large-scale flooding,
I believe the insurance industry would do its part and provide cover to homeowners.
Caeva O’Callaghan is Managing Director of O’Callaghan Insurances, a third-generation family brokers with four offices in the North East. You can contact her on 042-9359000 or go to www.quoteme.ie/ www.oci.ie