Insuring Flood-prone Houses

11 December, 2009

One consequence of the recent floods is that Irish insurance companies will inevitably charge a higher premium to households which are located in low-lying or flood-prone locations.   They may even refuse insurance to such households.   Typically, in Britain, insurers require clients living in Flood Risk Areas to flood-proof their homes or face much higher premiums and excesses.  

According to today’s Irish Times, there is a  “flood blacklist” in Ireland, and “It’s the list you don’t want to be on. Insurers use geocoding to compile a list of areas liable to flooding, and then frequently blacklist homeowners living in those areas. Given the latest round of floods, this list is bound to get bigger…. While many insurance firms will exclude giving flood cover to homes in particular areas, others say they examine it on a case-by-case basis.”

Does this go against some principle of insurance?  Presumably not.   They already charge more for (say) insuring motorists who are aged under 25, or who are musicians by profession as opposed to accountants.  And I suspect house contents insurance costs proportionately more in Darndale than Foxrock.

In fact strongly discriminatory pricing of flood insurance would in the long run be a welcome development insofar as it would affect house prices and discourage building in exposed locations.

According to Wikipedia, “only 20% of American homes at risk for floods are covered by flood insurance. Private insurers are unable to insure against the peril of flood due to the prevalence of adverse selection, which is the purchase of insurance by persons most affected by the specific peril of flood. In traditional insurance, insurers use the economic law of large numbers to charge a relatively small fee to large numbers of people in order to pay the claims of the small numbers of claimants who have suffered a loss. Unfortunately, in flood insurance, the numbers of claimants is larger than the available number of persons interested in protecting their property from the peril, which means that insurers are unable to cover their costs in flood insurance.”

However, what’s this I read? “If you are worried that you will no longer be able to get private home insurance cover, news that the State may set up a national insurance scheme is welcome.  Last week, Tánaiste Mary Coughlan said she was willing to consider such a scheme for those living in flood-prone areas and unable to get private cover.”

Does this mean that the taxpayer will subsidise insurance costs to facilitate the continuing construction of houses in locations that are prone to flooding?  Another leg up for FF builders?  This needs to be handled very carefully

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