Flood risk and climate change for homeowners

Sustainability means understanding risk and foreseeability vs uncertainty.

Homeowners should be encouraged to understand the degree of flood risk at their location, so that they can make informed decisions that could affect their financial objectives. The primary consideration should be to avoid foreseeable harm (both physical and financial). Homeowners should also understand the additional obligations where there is an outstanding mortgage. 

A number of factors are involved:

  • It is extremely important that ‘all risks’ buildings insurance (and contents) is in place with a reputable insurer.
  • This is also a key mortgage condition that buildings insurance is in place throughout the life of the mortgage. The property will be protected by this insurance, even if there is no outstanding mortgage.
  • Awareness of the flood risk should not just be at the point of house purchase. Flood risk is affected by climate change and other local factors.
  • The homeowner may consider taking positive action to increase their home’s resilience – and may require finance to do that. They can discuss this with their lender.

How to understand the risks? 

These are the four key risks associated with flood (and its susceptibility to climate change):

  1. Physical / Property risk – Physical risk is largely determined by location and topography.  While this is simple to grasp, there is currently modest attention given to the different types of flood. This is partly because physical risk is usually transferred to another party (an insurer).
  2. Timing risk - A borrower is committed to decades of purchasing buildings insurance whose terms and price are not known.  During the next, say, 30 years, we know that physical risk will make timing risk more significant. The parties need to understand what options are likely to be available in this timeframe.
  3. Indirect risks - As the Climate Biennial Exploratory Study (CBES) notes, the price and availability of insurance in the future is not known so that creates two more sub risks:
  • Pricing risk – as the physical risk increases, so will the cost of risk transfer.
  • Insurability risk - in that if the physical risk cannot be transferred (because insurers become reluctant), it comes back to the borrower (as physical risk) under the terms of the mortgage.
  1. Credit risk - As flood effects are felt by the borrower there will be a change in credit risk profile. The ability of the borrower to service the loan, acquire or renew insurance, assume any non-recoverable losses, and deal with possible property value impairment will also be affected by climate change.  

How should the homeowner be made aware?

Flood risk is a highly specialised knowledge area. According to the Environment Agency (EA) however, it may affect up to a quarter of all homeowners in the future (who face similar risks but have different obligations to mortgagees). 

At the point of purchase, the buyer should be made aware of the flood risk during the conveyance process. However, the risk is not static and we believe the homeowner would benefit from an expert view which is updated from time to time.

Lenders have better resources to understand this issue and could assist in connecting homeowners to the flood risk data providers (such as GeoSmart Information). The cost of discovering and keeping abreast of this risk is almost imperceptible compared to the potential loss from not taking appropriate action.  

Learn more about GeoSmart Information’s flood risk data here. You can also email lilyjordan@geosmartinfo.co.uk with any enquiries who will ask an expert to get in touch with you to discuss our services.

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