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Before the flood

Most people like a small flutter such as backing a horse in the Grand National. If they win, great. If not, it does not really matter, the stakes involved are not high and it is unlikely to make a big difference to their lives.

Each year, however, millions of households take a much bigger gamble and if they are unlucky the consequences are far more serious. Research indicates that 40 per cent of homeowners have no contents cover and those that do have little idea of the true value of their possessions and are significantly underinsured.

At first sight, these findings indicate that the sale of household insurance – contents and building cover – represents an important untapped market for financial advisers that could provide a valuable regular annual income stream.

However, before you build this into your cashflow forecasts for next year&#39s business plan, there are a number of difficult but not impossible hurdles that must be overcome.

Nobody enjoys paying insurance premiums and it appears that many homeowners are taking the view that contents cover is something they do not need. Last week&#39s British crime survey reported a 17 per cent fall in burglaries and this may well fuel complacency. But there is a much bigger threat which people would be extremely foolish to ignore – flooding.

Last year, 10,000 homes were affected by flooding throughout the UK. The Government has issued planning guidance to prevent new homes being built on flood plains but there are already 1.3 million homes in England and Wales in high-flood-risk areas.

It is anybody&#39s guess how many will be affected this year but the omens do not look good. Despite recent media coverage, many people seem oblivious to the risks.

There is little doubt that flooding has a devastating effect on people and properties. It is even worse if there is no cover to replace belongings.

In Britain, unlike the rest of Europe, flood protection is currently built into all buildings and contents insurance policies. Sadly, this fortunate situation is unlikely to continue for much longer.

The ABI has agreed with the Government that its members will maintain flood cover for existing customers until the end of next year but it has already ruled that insurers do not have to provide a quote for homeowners previously ins-ured by another company or for new properties in highrisk areas.

While agreeing to the moratorium on withdrawing cover, the ABI has called for a significant increase in the amount of money spent on flood defences. The Government, however, has admitted there is no quick solution and it could take up to 10 years for adequate flood def-ences to be put in place.

The most likely outcome is that flood-prone areas will be regarded as such a risk by insurers that, in due course, they will withdraw from providing cover or will only provide it for a much higher premium.

In addition, excesses will increase dramatically. One leading insurer has already introduced excesses of £8,500 for areas it regards as high-risk.

Insurers are currently adopting diverse strategies to reduce their risks and this provides IFAs with an opportunity to provide much needed, high-quality advice to homeowners living in vulnerable areas who will be increasingly faced with a variety of bewildering options.

Some insurers have developed sophisticated software which they claim iden tifies the areas most likely to be hit by floods.

However, it is not an exact science and at present advisers can still get cover for clients if they shop around. Currently, an area regarded as high-risk by one insurer may not be by another.

Advisers seeking an independent view of the areas most vulnerable to flooding should visit the Environment Agency&#39s web-site at www.environment-agency. gov.uk/flood.

Even houses unaffected by last winter&#39s floods are likely to see the cost of cover rising quite sharply.

The British Insurance Brokers&#39 Association recently suggested that premiums may have to go up by 40 per cent to restore underlying profitability and to allow insurers to begin to claw back the £1bn they have paid out to cover flood damage claims made since October 2000. So is there an opportunity or not?

Advisers will undoubtedly benefit from the hardening market. As rates go up, commission fees (normally around 15 per cent) will automatically follow and although there will be some resistance from homeowners to pay higher premiums, intermediaries who have access to a good panel of insurers should be able to get the cover their clients need at a competitive price.

For homeowners who have no insurance but live in high-risk areas, getting adequate cover is essential. It is easy to identify houses most a risk and these can be targeted through local mailshots.

It is a false economy for home owners to save a few hundred pounds but risk losing thousands and all they have worked for. When faced with this stark reality, the penny will drop with most people.

The need to have adequate cover provides a legitimate reason to contact existing and potential clients. The costs of a local marketing campaign should not be excessive and if you do not do it, maybe one of your competitors will. Now, is that a risk worth taking?

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