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By CYRIL TUOHY, managing editor

Lloyd's CEO Richard Ward said Tuesday that if the insurance industry priced flood coverage based on risk it would go a long way toward helping people adapt to the expected rise in sea levels resulting from the melting of the ice caps.

Pricing coverage of property in flood-prone areas based on risk would force property owners to think about the cost of living near water and that, if people want to live there, then they have to pay for it in the form of higher premiums.

People who don't want to pay the extra premium, or can't afford it, would therefore have more incentive to move inland where land is dryer and property coverage therefore cheaper.

"It's important to have risk-based pricing," said Robert Ward, director of public policy for the risk modeling vendor Risk Management Solutions. "It's what Florida is trying to do."

The other Ward, Richard, took over the helm of the storied British insurance market two years ago after working in the investment and financial services community. He is something of an outsider to the risk management sector as he doesn't come from the ranks of insurance carriers or brokers.

As such, Lloyd's Ward has seen the industry from a fresh perspective. He said he was surprised that risk-based pricing does not apply to many policies covering property near water. As waters rise and more property needs repair, premiums need to go up to pay for the damage, said Ward.

But, in part because of subsidies to developers, homebuyers often aren't aware of the true cost of living along the coast.

Implementing a risk-based pricing strategy would also represent one of the industry's most effective incentives to implement an economically viable near-term solution to owners of coastal property: the physical adaptation of those properties. "We absolutely have a role to play around that," he said.

Such an initiative would send the right economic signal to the markets, which is to discourage building in flood-prone areas, said Lloyd's Ward.

The flood issue is a major one, as a large percentage of the world's population live on or within 20 miles of the coast.

Under one scenario, a 30 centimeter rise in sea level by 2030, for example, could increases future average losses by more than 80 percent from present levels, according to a Lloyd's report on coastal communities. Another model finds that a 5 percent increase in the number of more powerful hurricanes would raise future average flood damage loss to more than 90 percent above present levels.

Near-term mitigation strategies are relatively simple. One answer is to raise houses on stilts. Raising homes by just 50 centimeters, for example, would lessen future average losses by more than 60 percent. Raising that same property by 150 centimeters reduces future average losses by more than 95 percent, the study found.

September 9, 2008

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