Money flood

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As climate change threatens increased risk of floods, banks and insurers have a responsibility to galvanise their insurance policies. Philippa Nuttall reports.

Wherever you are in the world, this summer has been marked by extreme weather events. Not least the floods in Pakistan, which have left one-third of the country underwater, damaged or destroyed over a million homes and killed more than 1200 people. In the UK and Europe, a lack of water is the most pressing problem. When the rains do come, however, the risk of flooding will be pronounced as the bone-dry earth struggles to absorb the torrential downpours that are becoming increasingly frequent. 

Scientific research shows that extreme weather events will only get worse and more common as climate change pushes up global temperatures. Banks are more aware of climate risk than ever before, but few are taking flood risk into consideration when analysing mortgage applications. If this omission continues, it will have negative consequences for financial institutions and householders. 

Banks take note

In May 2022, the Bank of England warned that without early action to reduce greenhouse gas emissions and better prepare for the impacts of climate change, the UK’s main banks and insurers would suffer. A surge in loan and mortgage defaults, investment losses and climate-related lawsuits could hit annual profits by 10–15%, it warned. These losses included physical risks, such as flooding.

“Historically, mortgage advice from banks has been predicated on the basis that if there is a flood, the insurance will cover it and it won’t impair the asset on the mortgage writer’s books,” says Andy Bord, CEO of Flood Re, a UK government-supported scheme aimed at making the flood cover portion of household insurance policies more affordable. 

“Banks are recognising that they need to look at lending criteria and that inputting flood risk is really important,” says Mr Bord. “People are talking about it and recognising the need for it,” but actually analysing flood risk in mortgage applications is “definitely not widespread”. He names only Nationwide as a UK bank actually putting this into practice.

Managing risk 

Flood Re was set up in 2016 to help householders in high-risk areas more easily and more cheaply access home insurance and deal with flood damage. Insurers pay into the initiative, raising a levy of £135m a year, which covers flood risk in insurance policies. It can cost £35,000–£50,000 to restore a home back to its pre-flood state, says Mr Bord. 

The scheme also helps householders, through their insurance policies, to proof their homes so that future rains cause less devastation. “With a mop and a bucket they can then be back in their house watching television the next day,” says Mr Bord. Making buildings more resilient to flooding can include raising electric sockets so rewiring is not needed after water enters a house, or installing special valves on sinks, toilets and drains to prevent sewers overflowing into homes. More than a million homes have benefitted from the scheme since 2016, he says.

Banks are recognising that inputting flood risk is really important

Managing flood risk is a cross-cutting issue that needs to be tackled by society as a whole, including government, local authorities, town planners, individuals, banks and insurers, according to Mr Bord. “We are starting to see movement in the right direction,” he says, but insists that much more needs to happen. Another of Flood Re’s aims is to get the market ready to stand on its own two feet – the initiative only reinsures buildings built before 2009 and it will end in 2039.

A rising tide

Financial institutions and policy-makers must likewise lift their noses out of today’s reality and look at the future risks of a warming world, according to Mr Bord. The UK Met Office forecasts that intense rainfall associated with severe flash flooding could become almost five times more likely by the end of the century. Approximately 1.9 million people across the country already live in areas at significant risk from flooding and this number could double by the 2050s, according to the UK government’s Climate Change Risk Assessment 2021.

It is not just torrential downpours that are expected to become more intense and more frequent because of climate change. Melting glaciers and snow are part of the reason why the floods in Pakistan have been so extreme, and these factors are predicted to lead to significant sea level rises globally in the coming years. 

At the end of August, scientists warned that global heating to date would cause a minimum sea-level rise of 27 centimetres as 110 trillion tonnes of ice melt from the Greenland ice cap. This is particularly bad news for the 600 million people living in coastal zones worldwide for whom a decent insurance policy may not be enough to keep their homes safe from devastation.


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