Sound banking principles require that commercial and residential properties subject to mortgage lending must be insurable. An estimated 5.2 million such properties in England & Wales are subject to flood risks of various kinds.
Since 1961, a series of agreements between Government and the insurance industry has effectively secured availability of insurance for all but a tiny number of homes and small businesses. Under pressure from increasing losses (in particular more than £3.2bn in the extensive floods of Summer 2007), reduced flood-defence investment and the growing impact of climate change, the insurance industry looks set to restrict or withhold cover from a much larger number of higher-risk properties as the current agreement moves towards its expiry date in 12 months time.
Addressing the consequences of this impending change is a challenge which must be faced not only by Government, property owners, investors and lenders, but also their professional advisors. Surveyors and solicitors in particular are on the front line. If the agreement is not replaced and cover is restricted then those which find themselves uninsured and with a blighted property will not be slow to bring forward claims if they feel there is an argument that they should have received (more) robust warnings. All those concerned with the underlying value of assets and compliance with capital adequacy rules also need to monitor developments and to keep a close eye on how the availability of cover will affect the value of UK property portfolios.
The current position
The current agreement between Government and the Association of British Insurers (ABI) is set out in a document agreed in 2008 called the “Revised Statement of Principles”; it remains operative, albeit with significant caveats, until 30 June 2013. The core text below illustrates that after that date it falls well short of “guaranteeing” ongoing insurance cover:
“The Government and the insurance industry have agreed that the conditions should be in place to enable the insurance market to be able to provide flood insurance to the vast majority of households and small businesses efficiently and without the specific commitments below from July 2013. Thereafter, the industry will continue to work with existing customers to exploreinsurance options for domestic property and small business customers where the flood risk issignificant and no public plans are in place to defend the property.”
Reduced spending on flood-defence schemes is an important, but by no means the only, unsettling factor which is driving insurers’ underwriting behaviour. It comes against the backdrop of growing development pressure for more affordable homes, much of it on (cheaper) urban marginal and reclaimed land which tends to be low-lying and more susceptible to flooding. Even where new development or refurbishment is accompanied by self-funding infrastructure improvements, these generally connect directly or indirectly into Victorian-era drainage systems which themselves require increasing resources to maintain. Only modest additional loading can bring about catastrophic and expensive failures.
Whatever one’s political stance and outlook, it seems most unlikely in the current economic conditions that there will be a significant increase in either public or private funds available for flood defence work within the lifetime of the present Government. ABI members recognise these pressures, are all suffering from lower investment returns and are therefore likely to continue to adopt a cautious approach to the highest-risk category of flood-risk properties.
RICS guidance and technological advances
Against this backdrop, Royal Institute of Chartered Surveyors (RICS) guidance states as follows:
“Many properties which have not previously been at risk of flooding now are. Of the 28 million homes in the UK, over 5 million are currently at risk, as well as over 300 000 business premises and many more public and utility services buildings. For most of these properties the risk of being flooded in any one year is still small, but for several hundred thousand properties, especially those which have been flooded in recent years, the risk is more significant. Buildings insurance underpins mortgage lending, to the extent that a failure to access insurance usually means no mortgage. In other words, if insurance is not available, a property could become impossible to buy or sell.”
There are inherent uncertainties regarding the number of properties to be affected. Of the “several hundred thousand” referred to in the RICS guidance, many are likely to be affected by much higher insurance premiums but these are unlikely to be worth substantially less as a result. Although only a small proportion of owners/lenders/investors may find their properties uninsurable, that may still be a relatively large number and the capital losses correspondingly severe.
For any “at risk” property which is bought or sold, remortgaged or let (especially in the run-up to 30 June 2013 but also beyond), the relevant parties need to be made aware of the uncertainties associated with the availability of insurance and, in appropriate cases, of the potential for adverse impact on capital value and future saleability. There are several steps which should be taken in these circumstances to assess flood risk and the associated uncertainties regarding insurance:
- Heightened awareness of potential flood issues must be the starting point. The proximity of streams, watercourses or culverts may warrant express mention in a surveyor’s report or may prompt a conveyancer to recommend that their client instruct further specialist enquiries or investigation. If specialist investigations yield results which are likely to impinge on value this should be referred back to the surveyor.
- RICS guidance on Professional Standards in Valuation (the Red Book) now refers expressly to the Environment Agency (EA) flood-risk maps (see link below). It is important for anyone using them to appreciate that the EA maps currently deal only with risks arising from coastal and “main” river sources (as distinct from surface water or other risk sources) and do not purport to give property-specific information or advice.
- Environmental reports are relatively cheap (from £30) and most will access, and the content be derived from, specialist databases. Whilst they may appear impressive, comprehensive and authoritative on their face they should still be treated with caution; read the small print carefully. The quality of data on flood-risk is improving rapidly but it remains patchy and is, by definition, always a moving target. Property specific advice from a flood-risk consultant or hydrological engineer may be appropriate where data is limited.
- For professional advisors, agreeing appropriate engagement terms and managing the client’s expectations of what can and cannot be done within the scope of a survey (or lesser report) is always important. Different clients will have very diverse risk appetites and a wide range of understanding (and lack of understanding) on technical issues such as flood-risk and insurance. Once a property is identified as being within a higher risk category then the cost benefits will usually be in favour of further investigation and specialist advice. The cost of more in-depth reporting is likely to be tiny compared to the value of a property, secured loan or lease obligation; or indeed to the downside of that client investing in a potentially uninsurable building. With one in six properties in England and Wales at risk, extreme weather events on the increase and just over 12 months until the present arrangements expire, now is the time to review potential exposure and to obtain relevant advice.