400,000 could sink without trace for insurance

A new system for measuring flood risk will hurt many homeowners

Thousands of homeowners could find their properties uninsurable and so unsellable once the use of a new system to pinpoint the risk of river flooding to individual homes becomes widespread.

Norwich Union last week launched its new digital map in parts of Shropshire and Norfolk, both high-risk flood areas. The multi-million-pound project will be rolled out across the UK this year, and Norwich Union says it means that 600,000 homes in areas like these will now be able to get cover.

The digital map provides detailed information on the height of land surrounding rivers, so the risk to properties will no longer be assessed according to postcode.

"Although insurance companies can't stop properties being flooded, we believe we have a responsibility to ensure flood risk is calculated as accurately as possible," says Laurence Loughnane, head of underwriting at Norwich Union. "Because of the level of detail provided by the map, people who previously thought their property was uninsurable could now obtain cover. The ability to pinpoint whether an individual house is on a hill or raised ground, and how flood waters will flow, is invaluable in the fight against flood damage.

"The new information will help convey to customers how severe the risk to their property will be and how often a flood can be expected."

But while this is good news for householders who may have been unnecessarily penalised in the past, an estimated 400,000 people living in flood-risk areas might not be able to get any cover, at least not at an affordable price. And if a property is uninsurable, it is also impossible to sell.

Under the Association of British Insurers' Statement of Principles (see the article below), introduced in January 2003, insurers will continue to cover most existing policyholders even if they live on a flood plain. But there is no guarantee that their premiums will stay the same.

Under the current system for calculating flood risk, that risk is spread among the 15-odd properties sharing the same full postcode. But with digital mapping, several properties in the same street could have different flood-risk levels because of their precise height above sea level. This could result in wildly different insurance premiums.

"At the moment, every house in the area pays a higher premium, but once you narrow it down, those people whose house is at a high risk of flooding will pay a lot more," says Richard Mason, director of insuresupermarket.com, a website that compares the cost of hundreds of policies. "The risk is no longer spread among several households but concentrated on one or two. For every 10 happy winners there is likely to be one very unhappy loser."

Mr Mason adds: "Norwich Union is pre-empting changes that will affect the whole of the home insurance industry come October, when information on individual homes at flood risk becomes available to all insurers.

"If you shop around now and get the best deal you possibly can well in advance, then come October, even if it transpires that you are considered high risk, your insurer will still be obliged to continue to cover you."

Existing Norwich Union policyholders will see changes to their premiums once their cover is up for renewal. Customers living in flood-risk areas can expect their premiums to go up, though the extra cost may be phased in over several years.

"We wouldn't expect policies to increase by more than 10 per cent a year," says a Norwich Union spokeswoman. "But we wouldn't be able to tell policyholders whether their policy will rise again the following year or not."

Norwich Union will have individual discussions with policyholders living in high-risk areas to suggest ways of cutting their premiums. One way of doing this is to take a higher excess on the cover.

Policyholders should shop around for insurance when their cover is up for renewal, even if they live in a flood-risk area. But they should be prepared for rejection, as other firms may refuse to cover them.

"We encourage homeowners living in high-risk areas, or who have previously made a flood-related claim, to stay with their existing insurer," warns Malcolm Cooper, business manager for Direct Line home insurance. "Many companies load premiums on such new business, or reject on the basis of potential risk."

What if the waters rise?

Insurers are obliged to continue to cover existing policyholders under the ABI's Statement of Principles:

* In areas currently defended to government standards of one flood in 75 years or better, insurers will offer flood cover in the normal way on buildings and contents insurance, both to existing policyholders and new customers.

* In areas where defences will be improved to this standard by 2007, insurers will continue to cover existing policyholders. If a homeowner in one of these areas sells their property, their current insurer will continue to provide cover to the new owner.

* In areas where no improvements in defences are planned, insurers cannot guarantee to provide cover in all cases. Where there is a history of flooding, they will use their best efforts to work with policyholders to establish on a case-by-case basis what action they, the Environment Agency and the local authority can take for cover to continue.

Source: ABI