A proposed new scheme for flood insurance in the UK may not be sustainable because the impacts of climate change have not been taken into account, says a report by the Grantham Research Institute.

The policy paper was published by the Centre for Climate Change Economics and Policy and the Grantham Research Institute on Climate Change and the Environment at the London School of Economics and Political Science.

In June the government announced proposals to ensure that areas at risk of flooding will be able to be insured. Responding to the consultation by the Department for Environment, Food and Rural Affairs on ‘Securing the future availability and affordability of home insurance in areas of flood risk’, Dr Swenja Surminski warns that “flood risk is expected to increase due to climate change and continued development of floodplains for residential and commercial property, which increases the exposure of homes and businesses”.

The new scheme, Flood Re, has been put forward as an alternative way of offering flood insurance from 2015 to an estimated 500,000 UK homeowners who live in areas of high flood risk. About 6 million residential and non-residential properties in the UK are thought to be exposed to some level of risk of coastal, river or surface water flooding.

In order to cover the claims for losses caused by damage to homes at high risk of flooding, the premiums for all residential property insurance policies, including those for homeowners at moderate, low or no risk of flooding, will include a levy of £10.50. This charge will explicitly provide Flood Re with an estimated £180m annually, which the ABI considers is equivalent to the total implicit subsidy from existing policy-holders to cover claims from the 500,000 homes at most risk of flooding. Policies for those homeowners not at high risk of flooding, and therefore not included in Flood Re, will still be provided through insurance companies operating in ‘the free market’.

But the paper by Dr Surminski and colleagues points out that the ‘Impact Assessment’ for the scheme which was published by the Government does not mention the effect of climate change. The UK Climate Change Risk Assessment, published by the government in January 2012, indicated that the number of residential properties in England and Wales exposed to a significant risk of coastal or river flooding could increase from 370,000 in 2008 to between 450,000 and 800,000 by the 2020s (assuming no new buildings), and between 500,000 and 1.5 million by the 2050s.

The paper states: “The design of the Flood Re scheme, which is expected to last until at least 2035, has not taken into account adequately, if at all, how flood risk is being affected by climate change. For this reason, it is likely to be put under increasing pressure and may prove to be unsustainable because the number of properties in future that will be at moderate and high probability of flooding has been significantly underestimated.”