Social justice and flood insurance: markets or solidarity?

Philosophical research on the limits of - and alternatives to - market responses to environmental problems reveals the unjust impacts of market-based approaches to flood insurance.

Flooded street
The research team at Manchester has developed a philosophically informed critique of the market-based approaches to environmental problems.

Our work in philosophy at Manchester has been critical of the increasing use of markets in environmental governance. This work informed arguments against UK government proposals for a free market in flood insurance and contributed to the introduction of the FloodRe scheme, which offers householders in high flood-risk areas buildings and contents insurance premiums based on Council Tax band rather than risk of flooding. This scheme -- though far from perfect and intended to be a temporary measure before reversion to a fully risk-based system -- has resulted in a much fairer situation. Around 300,000 householders have benefited, either through significantly cheaper home insurance or through being able to secure insurance at all when previously they could not.

The research

John O’Neill’s research has addressed the limitations of market-based responses to environmental problems – e.g. in his Markets, Deliberation and Environment (Routledge 2007) and 'Austrian Economics and the Limits of Markets' (Cambridge Journal of Economics 36, 2012) – as part of his broader research on climate justice, and specifically on socio-spatial vulnerability to climate hazards. A range of personal and social factors (age, income, crime rates, local knowledge, social networks, etc.) make some people more vulnerable to harm as a result of climate hazards, such as heatwaves and flooding, than others; this is 'socio-spatial vulnerability'.

In the 2011 research report resulting from the Joseph Rowntree Foundation-funded project Justice, Vulnerability and Climate Change, O’Neill and his co-authors explicitly take the ability to take out insurance against flood damage to be part of one of the ‘dimensions’ of socio-spatial vulnerability: ‘ability to prepare’. Various factors (primarily lack of wealth) make it more difficult for some people to avoid prohibitively high flood insurance costs because they are unable to move to a lower-risk area. One of the key recommendations of this research was a shift to a more solidaristic – and hence non-market-based – scheme of insurance that protects those who are disadvantaged.

A second JRF-funded project – Climate Change, Insurance and Social Justice – resulted in the 2012 research report Social Justice and the Future of Flood Insurance, co-authored with Martin O’Neill (Philosophy, York). This research challenged the conventional thinking in the literature on the future of flood insurance, which is dominated by economic arguments for market-based insurance based on the premise that differentiating premiums by risk is both fairer and more efficient.

O’Neill and O’Neill interrogate the notion of ‘fairness’ in play in these arguments. They argue that there are three distinct notions of fairness that we might use to determine how the costs of flood insurance are to be distributed fairly:

  • Pure actuarial fairness – insurance costs to individuals directly reflect their risk level
  • Choice-sensitive fairness – insurance costs to individuals reflect only those risks that result from their own choices
  • Fairness as social justice – insurance for people’s basic needs (eg housing) should be provided independently of individuals’ risks and choices.

O’Neill and O’Neill argue that only the third of these conceptions of fairness is appropriate for the distribution of the costs of flood insurance. The basic idea is that flood insurance protects vulnerable people from the risk of the catastrophic economic shock that serious damage to one’s home and loss of possessions that flooding can cause. Without that protection, they are unable to make reasonable predictions about their future and hence unable to engage in certain kinds of long-term agency and planning. Flood insurance, O’Neill and O’Neill argue, is, therefore, a ‘gateway good’, which – as with healthcare and various kinds of public benefit – should be available to all, independently of their choices or their level of risk.

What happened next?

In 2011, the Department for Environment Food & Rural Affairs (Defra) had released a report, Flood Risk and Insurance: A Roadmap to 2013 and Beyond. 2013 was the expiry date of the ‘Statement of Principles’ on flood insurance, a loose agreement between the UK government and members of the Association of British Insurers (ABI) that had been in place since the 1960s. In effect, the Statement of Principles committed the insurance industry to insuring properties with a high (>1.3% annual) risk of flooding on condition that the Environment Agency had concrete plans to reduce flood risk to below that threshold. The 2011 Defra report listed as a ‘principle’ that ‘Flood insurance premiums and excesses should reflect the risk of flood damage to the property insured’; that is, it enshrined a commitment to ‘pure actuarial fairness’.

O’Neill and O’Neill’s JRF-funded research and the resulting 2012 report were developed in response to the Defra report, and in the context of discussions between the government, the ABI and other stakeholders concerning the future of flood insurance once the Statement of Principles expired. The report played a pivotal role in the 2013 agreement between the government and the ABI to introduce the Flood Re scheme – a world-first joint initiative designed to ensure affordable home insurance for high flood-risk residential property – whose statutory underpinning was established by the Water Act 2014.

The result

Flood Re offers insurance companies flood reinsurance (for both buildings and contents) priced according to Council Tax band and independently of risk, with a low, fixed excess of £250. The insurance companies are thus, in turn, able to offer their customers risk-insensitive flood insurance with an excess that is normally dramatically lower than previously. Thus the biggest beneficiaries of the scheme – and hence of the underpinning research – are insurance customers who live in low Council Tax band properties with a high risk of flooding, who have benefited significantly from a reduction in their insurance premiums and the excess payable if they claim.

Flood Re has had a very significant effect on the affordability and availability of household insurance for eligible homes. A House of Commons Library briefing paper (December 2020) states: “Since its launch, Flood Re has been able to report strong and clear benefits for most domestic customers in areas at risk”. The briefing paper documents an example: a homeowner whose house had flooded just once in 30 years, in 2013. After the flood, she was forced to take out home insurance policy that excluded flooding: “I haven’t been able to find any flood insurance that was anywhere near affordable. It was a £3,500 premium with a £30,000 excess in the first year”. After the introduction of Flood Re, policies “were available for as little as £425, with much lower excesses than had previously been available”.

As reported in Flood Re’s Quinquennial Review in 2019, which fulfils its statutory duty to report every five years to the Secretary of State, and its 2019/20 Annual Report:

  • More than 300,000 properties have benefited since the launch of the scheme in 2016, with 196,638 policies in 2019/20.
  • 80% of households with prior flood claims have seen a price reduction of more than 50% in their home insurance premiums.
  • 98% of households with prior flood claims can now receive home insurance quotes from five or more insurers. Prior to the launch of the scheme, only 9% could get two or more quotes and none could get five quotes.
  • 94% of the home insurance market now offers the scheme.

By the lights of O'Neill and O'Neill's 2012 report, the FloodRe scheme – while much fairer than the market-based insurance regime that the government wanted to replace the 'Statement of Principles' – is far from ideal. For one thing, the government's aim is for the scheme to expire in 2041, to be replaced by fully market-based insurance (though this is based on the assumption that flood defences will have been very significantly improved by then). In addition, the scheme certainly does not constitute a 'fair' scheme in the sense that O'Neill and O'Neill argued for. For example, insurance policies taken out under the scheme are still likely to be more expensive than those taken out by people who do not live in high flood risk areas.