AXA FLOODING RESEARCH THE TRUE COST OF FLOOD INSURANCE vember 2010
About AXA AXA Insurance is one of the largest general insurers in the UK and underwrites a broad range of products for individuals and businesses. Products are distributed primarily through brokers, intermediaries and corporate partners with some home, motor, travel and pet insurance also offered directly to customers through its website www.axa.co.uk and via Swiftcover. AXA Insurance is the UK general insurance subsidiary of AXA UK which in turn is part of the AXA Group. AXA Group is a worldwide leader in Financial Protection. AXA's operations are diverse geographically, with major operations in Europe, rth America and the Asia/Pacific area. 2
Key flooding data 1 The Scale of the Flooding Problem: The Environment Agency estimates that 5.2 million homes in England alone are at risk of flooding that s one in six and 185,000 businesses. Many properties are threatened by surface water flooding, as well as flooding from rivers and the sea. The 2009 floods in Cumbria demonstrated how devastating flooding can be not just to homes, but also to businesses. The Environment Agency has estimated that if investment in flood defences stays constant there will be 350,000 more properties in England at significant flood risk by 2035. The insurance industry covers much of this risk. It paid out: 3bn after the 2007 floods. 174m after the 2009 Cumbrian floods. An average of 20 40k per household flood claim, and 60k per business claim. The levels of flood cover provided by the UK insurance industry today are almost unparalleled in Europe. 1 ABI Fighting Flooding Together Report vember 2010 3
Introduction The long lasting effects of climate change and more frequent extreme weather incidents are of crucial importance to AXA. As we have seen through the devastation caused by previous floods, in order to mitigate their impact concerted effort by a number of different parties is required. Over recent years, the availability of flood insurance to those householders and small businesses located in flood threatened locations has been provided via a Statement of Principles - an agreement between the Government and the insurance industry whereby insurers agree to maintain flood cover with the proviso that the Government continues a programme of investment to improve flood prevention. Over time and as the nature of flood risk has changed, the reliance of the Statement of Principles has resulted in home owners or buyers in flood affected areas paying a premium lower than what is required. For AXA, this means that our technical prices are being subsidised by an average rate of 58%, i.e. on average, high flood risk customers are paying 42% of the premiums they should be paying. The current agreement between the Government and the insurance industry will finish in 2013 and a practical and sustainable solution to replace the Statement of Principles is required. 2013 will mark the end of flood insurance as we know it and AXA intends to play a full part in helping to shape the future of flood protection. While we understand the need to bring fiscal stability to the public sector deficit, and welcome the Coalition s stated priority to prepare for and manage risk from flood and other environmental emergencies we were particularly disappointed in the cuts announced in the 4
Comprehensive Spending Review and DEFRA flood defence budget from 2.15 billion over three years to 2 billion over four years. Moreover, we want to see a long-term strategy to flood prevention being implemented by the Government rather than the short-term planning over single Parliamentary terms that we have become accustomed to. We also need a clear understanding of what the Government s revised spending plans for flood prevention will deliver; including a firm idea on how much funding is for new capital projects and how much is for maintenance of existing flood defences. To date, much of the discussion around flooding has been focused on river and coastal events we want to see much more attention given to the full range of flood risk management, including problems associated with surface water brought about by unusual rainfall patterns. In 2007, 75% of AXA s flood claims were as a result of surface water and in the Cumbrian floods of vember 2009 less than a third of AXA s flood claims were in a designated high flood risk region. This pattern has been repeated in the initial claims experienced from the Cornwall floods of vember 2010. 5
Background to research It was with the conclusion of the 2013 Statement of Principles in mind that AXA embarked upon research into attitudes and awareness of flood insurance in higher risk flood regions. Our rationale was our continued desire to promote early discussion and dialogue to ensure that at the conclusion of the Statement of Principles some other risk sharing formula would be embraced that would ensure continuation of flood protection. We believe an understanding and awareness of flooding issues among those living in affected regions would add to the debate. We have undertaken polling into how much consumers within flood affected areas understand their insurance protection their actual premiums and the relative costs of providing a real technical price for protection. Methodology The polling firm, ComRes, were tasked with carrying out the survey to assess attitudes towards flood insurance and to gauge consumer awareness of some of the funding issues surrounding the provision of such insurance. Those surveyed were householders in areas of flood risk and so would be required to ensure they had flood insurance. Over the course of 4 days this year (25 th 29 th August) they surveyed a total of 1000 individuals in 11 key regions; Ayrshire and Arran, Berkshire, Buckinghamshire, Cambridgeshire, Country Durham, Cumbria, East Yorkshire, Gloucestershire, rth Yorkshire, Oxfordshire and South Wales. The survey group contained representative numbers of men and women and also spanned all social classes from AB DE. 6
The Research We outline below the questions and responses, alongside graphical analysis of the response to individual questions based on the social class of the respondent. The rationale for the social class analysis is that individual constituencies have different socio-economic structures and given the difference in terms of attitude to subsidies and the right to low cost flood insurance it is useful to know where the most/least enthusiastic nodes for these opinions will be found. 7
Question 1: Are you aware that insurance premiums in your area are being subsidised by the premiums from people living in areas with a lower flood risk, or not? Our results provided a clear answer that 77% of respondents were unaware that their insurance premium was being subsidised by those living in areas with a lower flood risk. This shows a lack of awareness of the true cost of home insurance in these areas. Looking at the data further we found that among different age ranges the quartiles that were most unaware were those ages between 18-34 (82%) and 35-44 (83%). There exists also a higher lack of awareness among C2 (81%) and DE (79%) classes, than among AB (74%) and C1 (76%). We also see another interesting example in that the regions of Buckinghamshire and Cambridgeshire record the highest levels of a lack of awareness of subsidisation. 8
Social class % AXA Insurance Are you aware that insurance premiums in your area are being subsidised by the premiums from people living in areas with a lower flood risk, or not? 70 60 50 40 30 20 10 0 DE C2 C1 Don't know AB 0.00% 20.00% 40.00% 60.00% 80.00% 100.00% 9
Question 2: Are you aware that if the Government does not continue to invest in flood defences, insurance companies may have to stop providing flood insurance, or not? Our results again showed a clear result that people had not considered the continued availability of insurance if the Government did not continue to invest in flood defences. Results showed that 66% were not aware. In particular we see least awareness among the younger quartiles notably 18-34 (78%) and 35-44 (76%). 10
Social class % AXA Insurance Are you aware that if the Government does not continue to invest in flood defences, insurance companies may have to stop providing flood insurance, or not? 70 60 50 40 30 20 10 0 DE C2 C1 Don't know AB 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 80.00% 11
Question 3: How much do you think the average premium in a high-risk flood region would need to rise to reflect the true cost of flooding insurance? Only 19% of respondents got anywhere near a correct answer, believing it to be above 40%. The true answer is well over 50%. This clearly shows a disconnection and lack of awareness between individuals and their insurance premiums. This is further validated as 36% of respondents (the highest respondent figure) opted for don t know. 12
Social class % AXA Insurance How much do you think the average premium in a high-risk flood region would need to rise to reflect the true cost of flooding insurance? 40 35 30 25 20 15 10 5 0 Up to 10% 11-20% 21-30% 31-40% Above 40% Don't Know Don't know Above 40% 31-40% 21-30% DE C2 C1 AB 11-20% Up 10% 0.00% 5.00% 10.00%15.00%20.00%25.00%30.00%35.00%40.00%45.00%50.00% 13
Question 4: Do you think people who buy properties in high flood risk areas should expect to have access to affordable flood insurance, even if this is priced below the real cost to the insurer, or not? A majority of respondents (62%) agreed that people who bought properties in high flood risk areas should have access to affordable flood insurance, even if this is priced below the real cost to the insurer. This figure was highest among younger ages with 72% of people aged between 18-34 and 69% aged between 35-44 considering this to be the case. These figures contrast with those aged over 55, where 55% of those between 55-64 and 53% of those aged over 65 think that affordable flood insurance should be provided. 14
Social class AXA Insurance Do you think people who buy properties in high flood risk areas should expect to have access to affordable flood insurance, even if this is priced below the real cost to the insurer, or not? 70 60 50 40 30 20 10 0 DE C2 C1 Don't know AB 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 80.00% 15
Question 5: If the insurers cannot continue to offer premiums below the real cost of insurance, do you think the Government should provide subsidies from taxpayers money, or not? At a time of fiscal tightening, question 5 asked respondents whether there should be Government subsidies. Although 52% of respondents replied that there should not be public subsidies, the figure for those that were in favour of subsidies was relatively high (42%) by comparison to other responses to questions during the research. Where we may have expected some divergences on this question was between social classes, this was not the case with only a 9% difference between AB (54%) and DE (45%). 16
Social class AXA Insurance If the insurers cannot continue to offer premiums below the real cost of insurance, do you think the Government should provide subsidies from taxpayers money, or not? 60 50 40 30 20 10 0 DE C2 C1 Don't know AB 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 17
Question 6: Do you think developers should be allowed to build property in high flood risk areas, or not? The response we received for Question 6 was an emphatic, with 90% of respondents replying that properties should not be built on high flood risk areas. This answer articulates a clear view that respondents lay part of the blame at developers, and think they should be more cautious and considered in where property development takes place. It does though also raise issues concerning the role of Local Authorities in granting planning permission in areas threatened by flooding. 18
Social class % AXA Insurance Do you think developers should be allowed to build property in high flood risk areas, or not? 90 80 70 60 50 40 30 20 10 0 DE C2 C1 Don't know AB 0.00% 20.00% 40.00% 60.00% 80.00% 100.00% 19
Question 7: If new properties are built in high flood risk areas, do you think home buyers should be required to sign a statement to show that they understand that they are purchasing a house in a high flood risk area, or not? The response to question 7 provided a strong response similar to that of question 6, in that 93% of respondents agreed that homebuyers should be required to sign such a statement. This raises an interesting parallel with the respondents on questions 4 and 5. The response to this question, 7, suggests that some liability lies with home buyers, driven by the declaration that they understand they are living in a flood affected area. However, the response to 4 and 5 were less definitive when respondents were asked for their views on whether people should have access to affordable flood insurance and whether there should be Government subsidies. 20
Social class % AXA Insurance If new properties are built in high flood risk areas, do you think home buyers should be required to sign a statement to show that they understand that they are purchasing a house in a high flood risk area, or not? 100 90 80 70 60 50 40 30 20 10 0 DE C2 C1 Don't know AB 0.00% 20.00% 40.00% 60.00% 80.00% 100.00% 120.00% 21
Question 8: The real cost of insurance premiums in areas prone to flooding is 50% higher than the amount currently paid by consumers. Would you be willing to pay this extra for insurance protection? Just under two thirds of respondents (57%) replied that they would not be willing to pay this extra amount. This could be interpreted in a number of ways. First, that people are not prepared to pay more for their insurance as they are unable to afford it, or simply do not want to pay for it. Secondly, given that 38% said they would pay, it might suggest that insurance premiums are in fact low and people would be able to afford to pay an extra 50%, for the quality of life advantages of living in a particular area means that the rise in premium is justifiable. It is worth adding that there is a difference in the response among social classes with 42% of AB s saying yes to paying the premium, but only 34% of DE s saying yes. We see a similar relationship among those responding with 55% from AB and 61% from DE. 22
Social class % AXA Insurance The real cost of insurance premiums in areas prone to flooding is 50% higher than the amount currently paid by consumers. Would you be willing to pay this extra amount for insurance protection? 60 50 40 30 20 10 0 DE C2 C1 Don't know AB 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 23
Home insurance some key facts AXA provides home insurance to 22,000 properties at high risk of flood The premium for these 22,000 properties is currently subsidised to the tune of 11.3m with each high risk property receiving an average subsidy of 511 Our technical prices are being subsidised to an average rate of 58% meaning that customers in these regions pay premiums at a level of 42% of what they should be This would suggest that every non-high flood risk customer is paying 12.65 to cover the cost of this subsidy. In rough terms, this is about 5% of their premiums. 76% of properties are subsidised between 1-1,000 p.a. (45% between 1-500, and 31% between 501-1,000) 24
Conclusions Our research raises a number of public policy issues above and beyond access to affordable flood insurance. Most notably there is a clear lack of awareness amongst those living in high flood risk areas that their premiums are being subsidised. On a more equitable risk sharing model after 2013 the potential rise in property insurance premiums will come as a shock. We must also acknowledge the likelihood of a similar lack of awareness among householders who live in low flood risk regions but who currently cover the cost of the subsidy. The research also raises issues over housing. With the possibility of insurance premiums increasing, and a lack of commitment to people either wanting or able to pay anything extra, questions arise over access to current stocks of housing, future property development and the possibility of property blight. 25