What I Wish I Understood About Flood Risk Before Buying My First House.
By: Rob Simpson
Tags: Money, Personal Finance, Home, Risk, Finance

Risk Categories

In England, the Environment Agency is responsible for flood risk. To help the public understand their personal risk, they provide maps that break down the country’s flood risk into zones.

Maps are available for the following sources of flooding:

Fluvial flooding. This is flooding from a watercourse such as a river or a stream Coastal flooding. This is flooding as a result of tidal inundation and or wave overtopping. Surface water flooding. This is flooding from heavy rain that exceeds the capacity of the drainage network.

Within each of these categories, there are 4 risk bands these are:

Very Low. A 0.1% annual exceedance probability (AEP) or a 1 in a 1000 year flood event Low. A 1% AEP or a 1 in a 100-year flood event Medium. A 3.3% AEP or a 1 in a 30-year flood event High. Below 3.3% AEP or less than a 1 in a 30-year event.

My Risk

As already mentioned, my property falls within the low-risk band. It has no prior history of flooding and was built over a century ago. So what’s the problem?

Well, climate change is likely to cause an increase in both frequency and intensity of storms. As a result, properties with or without flood history are expected to flood with increased frequency in the future.

My further research also highlighted that low risk is quite a broad term and is actually a range. Covering anywhere between 3.29% AEP, just below the medium risk band, and 1% AEP. This knowledge, coupled with my pessimistic nature, makes me believe my risk could be closer to 3.29% AEP. Or a 1 in a 30-year flood event.

The scary fact is that my mortgage is a 30-year term and if we calculate the probability of my property flooding during my mortgage, it is

1-(1–0.033)³⁰ = 0.63 or 63%.

Giving a higher likelihood of my property flooding during my mortgage term than I have of guessing the result of a coin toss.

Insurance

Home insurance provides a hedge against the risk of property damage. Be that from flooding, fire, or other natural phenomena. Properties at flood risk typically see higher premiums which increase with flooding evidence. In some countries, flood risk properties can be so unattractive to insurance providers they either won’t insure a property. Or will charge unrealistic premiums, pricing homeowners out of the insurance market.

Fortunately, in the UK, the government runs a levy system called Flood RE. The aim of Flood RE is to provide all homeowners in the UK with access to affordable home insurance. To enable this, a part of all homeowner's premiums are paid into the Flood RE fund, raising roughly £180m each year. Insurance companies can then sell the flooding element of home insurance policies to Flood Re for a fixed price. If that homeowner then has a legitimate flood-related claim, Flood RE will use the fund to payout. In essence, this means all homeowners in the UK subsidise the insurance of those at risk of flooding.

Consumers do not interact with Flood RE, and it goes largely unnoticed. This low profile may be one of the reasons that result in the ceasing of Flood RE at its target end date towards the end of the decade. When this occurs, it is unknown if the government will replace the scheme. Or whether homeowners will have to fend for themselves.

Market Value

It is fair to suggest that Flood RE is helping to hold home valuations. If the end of Flood RE is announced with no replacement, market values could topple as these homes become expensive to insure and no longer desirable. This leaves those homeowners with the potential of falling home values and potential negative equity. With evidence of flooding likely to further compound this.