Stopping the flow 65
argument that Flood Re does not create new forms of subsidisation, but
merely formalises the already existing degree of cross-subsidisation’ (p. 27).
Flood Re is meant to operate for only 25 years. The 2018 update to the ‘transition plan’ indicates ‘the subsidy required to deliver [affordable household
insurance] cannot continue forever. The scheme was always intended to be
time-limited and by 2039, Flood Re will have exited the market. When that
happens, it is necessary that a market is in existence that is based both on
risk-reflective pricing of household insurance and is affordable and available
for households at risk of flooding’ (Flood Re 2018, p. 8). Over time, the transition to risk-based pricing should take place commensurate with a kind of
‘weaning’ off subsidies (Christophers 2019, p. 17).
Why must this weaning take place? Why is it ‘necessary’ that this free
market come into existence? Cross-subsidisation has always been a part of
flood insurance in the United Kingdom, and it has not been terribly controversial. As Penning-Rowsell (2015) observes, ‘the majority of the population
is not discontent in cross-subsidising those unfortunate to live in areas liable
to serious flooding’ perhaps because they do not realise they are the source
of the subsidy (p. 607). The choice of the word ‘unfortunate’ is also telling
in this context. Exposure to flooding may be more commonly perceived as
a function of bad luck, where residents are blameless victims who deserve
compassion, not moral judgment or market discipline.
Cross-subsidies of the kind formalised under Flood Re are regarded as
a flow in need of elimination not principally as a question of fairness, but
rather as one of prudence. When low-risk policyholders offset the costs of
high-risk policyholders, this dulls the purported incentive effects of insurance, where the price of premiums acts as a ‘signal’ of the underlying risk
(Surminski & Eldridge 2017), as The Economist worried. This ostensibly
perpetuates and even exacerbates the problem of high flood losses, in a
vision where individuals are imagined to exert meaningful control over their
exposure. With risk-reflective pricing, by contrast, policyholders can be
made prudent – meaning ‘rational, responsible, knowledgeable and calculative’ (O’Malley 1996, p. 203; Christophers 2019). More prudent individuals, conscientious about their individual risk exposure, will undertake wiser
decisions about where or how to live in relation to the water, proactively
managing the present with an eye towards the future.
Again, such thinking is also at the core of the NFIP’s commitment to
actuarial rating (Collier 2014; Elliott 2021). But in the UK case, unlike in
the United States, the aspiration to remove cross-subsidies is explicitly tied
up in a project of minimising state activity in flood insurance. This project
is one of pursuing what Christophers (2019) calls an ‘allusive market’: an
asserted, but largely unspecified, free market for flood insurance that will be
‘better’ than Flood Re, the transitional solution in place today. In that better
future, the government does not intervene directly to preserve affordability by setting rates (as in the United States) or by creating the conditions
for cross-subsidisation to persist. The price of flood insurance is more
argument that Flood Re does not create new forms of subsidisation, but
merely formalises the already existing degree of cross-subsidisation’ (p. 27).
Flood Re is meant to operate for only 25 years. The 2018 update to the ‘transition plan’ indicates ‘the subsidy required to deliver [affordable household
insurance] cannot continue forever. The scheme was always intended to be
time-limited and by 2039, Flood Re will have exited the market. When that
happens, it is necessary that a market is in existence that is based both on
risk-reflective pricing of household insurance and is affordable and available
for households at risk of flooding’ (Flood Re 2018, p. 8). Over time, the transition to risk-based pricing should take place commensurate with a kind of
‘weaning’ off subsidies (Christophers 2019, p. 17).
Why must this weaning take place? Why is it ‘necessary’ that this free
market come into existence? Cross-subsidisation has always been a part of
flood insurance in the United Kingdom, and it has not been terribly controversial. As Penning-Rowsell (2015) observes, ‘the majority of the population
is not discontent in cross-subsidising those unfortunate to live in areas liable
to serious flooding’ perhaps because they do not realise they are the source
of the subsidy (p. 607). The choice of the word ‘unfortunate’ is also telling
in this context. Exposure to flooding may be more commonly perceived as
a function of bad luck, where residents are blameless victims who deserve
compassion, not moral judgment or market discipline.
Cross-subsidies of the kind formalised under Flood Re are regarded as
a flow in need of elimination not principally as a question of fairness, but
rather as one of prudence. When low-risk policyholders offset the costs of
high-risk policyholders, this dulls the purported incentive effects of insurance, where the price of premiums acts as a ‘signal’ of the underlying risk
(Surminski & Eldridge 2017), as The Economist worried. This ostensibly
perpetuates and even exacerbates the problem of high flood losses, in a
vision where individuals are imagined to exert meaningful control over their
exposure. With risk-reflective pricing, by contrast, policyholders can be
made prudent – meaning ‘rational, responsible, knowledgeable and calculative’ (O’Malley 1996, p. 203; Christophers 2019). More prudent individuals, conscientious about their individual risk exposure, will undertake wiser
decisions about where or how to live in relation to the water, proactively
managing the present with an eye towards the future.
Again, such thinking is also at the core of the NFIP’s commitment to
actuarial rating (Collier 2014; Elliott 2021). But in the UK case, unlike in
the United States, the aspiration to remove cross-subsidies is explicitly tied
up in a project of minimising state activity in flood insurance. This project
is one of pursuing what Christophers (2019) calls an ‘allusive market’: an
asserted, but largely unspecified, free market for flood insurance that will be
‘better’ than Flood Re, the transitional solution in place today. In that better
future, the government does not intervene directly to preserve affordability by setting rates (as in the United States) or by creating the conditions
for cross-subsidisation to persist. The price of flood insurance is more