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12 July 2012

Spelman’s flood insurance is the UK’s Obamacare

Just wetter. And less controversial. Much like Britain.

By Alex Hern

Caroline Spelman is in talks with the insurance industry about mandating coverage of houses damaged through severe flooding.

The Telegraph reports:

Ministers are concerned that some insurance firms are able to “cherry pick” customers in low-risk areas and refuse to offer cover to home owners in flood-prone neighbourhoods.

At the same time, customers in high risk parts of the country cannot “shop around” for cheaper policies because they are tied in to their current providers under the existing agreement.

The Department for Environment, Food and Rural Affairs said most insurance companies already raise “a small sum” from policy holders to cover the cost of insuring homes at high risk of flooding.

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Mrs Spelman said she was proposing nothing more than “formalising” the existing “cross-subsidy” and that talks with insurance firms have made “significant progress”.

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The paper reports this with the headline “Every home to pay price of floods”, seemingly missing that this is the point of insurance. Individuals suffering severe losses mitigate the damage by spreading it around society. In most areas, this optional; in some, such as motoring and (in a way) health, it is not.

The real question is whether or not insurance companies should be allowed to refuse to insure those who live in areas prone to flooding.

The free-marketeer point of view is that of course they should. It’s a commercial transaction, like any other, and it’s not the government’s prerogative to force one party to enter in to it if they aren’t happy.

But the problem is that large swathes of the UK are prone to serious flooding. And as climate change bites, that’s only going to get worse. It doesn’t necessarily mean your house is definitely going to go underwater – if that were the case, you really should move – but it may be enough to render many places uninsurable.

And what then? It’s all very well telling, say, the entire population of London, Kent and Essex east of the Thames Barrier that they are prone to flooding, but that isn’t going to lead to them moving. Or, even worse, it might; Britain would be subject to development pressures like never before if that we the case.

It’s almost exactly the same as the major change brought in by Barack Obama in his Affordable Healthcare Act. That requires American health insurers to cover anyone who applies for insurance, without discriminating against pre-existing conditions; the Spelman deal will require British home insurers to cover anyone, without discriminating against pre-existing general floodiness.

We do get off slightly lightly, in that the most controversial part of Obamacare isn’t needed here. The individual mandate, which levies a fine on Americans who can afford health insurance but don’t buy it, is needed because of the fear that people would wait until they were diagnosed with a long-term condition before buying health insurance. If they did, insurance costs would spiral as insurers would be unable to use the premiums of healthy people to pay for the sick.

Luckily, there isn’t really a comparable problem for homes. If your house is underwater, it’s probably a bit too late to buy insurance. Although if Spelman’s deal leads to people desperately dialing Direct Line as the water flows up their street towards their front porch, that may need to be reconsidered.