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Associate Article

 13 May 2008 22:35 BST

Effect of floods on home insurance cost

According to a report by the Environment Agency, the recent floods that devastated parts of Britain in June and July have been the worst experienced in 60 years. Parts of England experienced rainfall of up to 4cm in just over 6 days, occurring on an almost daily basis for nearly 2 weeks.

Many were forced to leave their homes as flood waters rose by an unparalleled degree, causing untold damage that is set to cost the home insurance industry an estimated £4billion in claims.

The effect of this unpredicted disaster is a sudden rise in the cost of home cover. Leading home insurers have already stated an inevitable rise of 10% to the average home cover policy, which is set to cost the homeowner between £30 and £40 per year in extra money.

Insurers are defending this decision, stating that the increase is not simply a result of the recent floods, but reflects the rise in costs of general house maintenance. They suggest that there is an increase in the amount of bathrooms per property, which increases the risk of water damage. They also maintain that the homeowner is choosing to use more expensive materials when carrying out improvement works to a property.

Whatever the reasons, this rise is a sudden and unexpected leap for consumers. Home insurance prices have barely risen over the last decade, with social economists citing the decrease in burglary and subsidence claims as major factors.

Further misery is anticipated for flood victims, as the sheer number of claims being made will take a long time to process. The amount of paperwork itself has proven a major headache for some companies, who have had to hire emergency manpower to try and process the information as quickly as possible.

Yet this is of little comfort to many victims who are unable to replace lost and damaged items, or even to redecorate their houses until their claim has been fully investigated by home cover insurers.

Part of the insurance system that often goes unchecked is also responsible for the increase in home cover fees. This is likely to affect all consumers, rather than just those at further or expected risk from flooding.

When devastation, such as the recent flash floods, occurs, the victims of such an event apply for remuneration through their home insurance policies. The insurers have to cover those costs and, to minimise the risk to themselves, they will have applied to a reinsurer who effectively buys part of the risk of claim from that company.

As claims come into the insurers, they will be making claims themselves, via the reinsurers, who are part of global, multinational companies. To cover their costs, the reinsurers then raise the price of reinsurance for the companies that use them. In turn, the insurers cover that rise by increasing the cost of home insurance, in effect ensuring that the homeowner unwittingly finances the whole process.

But if the costs appear too outrageous to the consumer, the insurers and reinsurers will spread them into other areas, such as car insurance, using those fees to subsidise any losses they may experience.

There are plenty of policies out there, such as the Asda Home Insurance building and contents policy that include flood damage cover as standard. Many, the L&G home insurance policy for instance, will cover flood damage to your home but not fences, gates or hedges. It’s important that you check the small print and find out exactly what’s covered and what isn’t by your policy.

You can find a good general guide in the Motley Fool home insurance section and the Association of British Insurers website has plenty of useful info and advice of claiming for flood damage.End of story

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