9 PRINCIPLES OF SOCIAL JUSTICE THE UK OPERATES AN INDIVIDUALIST...

3.9  Principles  of  Social  Justice  

The UK operates an individualist, risk-sensitive insurance under O’Neill and O’Neill’s classification. Until

2015 when 'Flood Re' goes live, under the Statement of Principles, flood insurance is provided through

a free market in which individuals’ payments are in proportion to the level of risk to which they are

exposed. After 2015, 'Flood Re' will cover the majority of high-risk properties. This form of direct

government intervention in the UK market for flood insurance is a result of the system perhaps being

too free market. The more or less free rein given to UK insurers over the last decades has resulted in

socially and politically unacceptable outcomes, including unaffordable premiums and a growing

proportion of the population without flood insurance protection. With the frequency and intensity of

flooding set to increase across Britain (Lavers et al., 2013) this arrangement has come to be seen as

both commercially unsustainable by the insurance industry and unsatisfactory by consumers in the face

of yearly hikes in flood insurance premiums.

Given the decade of disagreements between the main stakeholders in the UK flood insurance market, it

has been difficult to obtain flood insurance for properties in high risk areas and almost impossible for

dwellings that have been repeatedly flooded (Botzen & Van Den Bergh, 2008). In the UK, those at high

risk of flooding are exposed to higher insurance costs and an expectation of rising future premiums.

Under the Statement of Principles, insurance companies were only obliged to offer insurance to existing

customers, not new ones. However, the picture is not a wholly black and white example of the free

market leading to negative externalities. In the UK there has for a long time traditionally been a small

subsidy from low risk to high-risk households (O’Neill and O’Neill, 2012). The Association of British

Insurers (ABI) calculated that over seventy per cent of homes at high risk of flooding are subsidised

(ABI, 2011). This arrangement results in a market penetration rate for flood insurance of over 90% for

owner occupied dwellings (DEFRA1, 2013). The figure for the rental and commercial sector is lower but still higher than in other countries.

Yet, for many UK low-income households, flood insurance premiums offered might be just about

affordable but deductibles and other contractual provisions to transfer risk included in the policy can be

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prohibitively high to discourage repeated claim making. It is unlikely such charges will incentivise low-

income households to invest in flood protection. A recently observed bubbling-over of public resentment

might, however, galvanise the government into taking action to make sure that 'Flood Re' leads to more

socially equitable than before, under the Statement of Principles.