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Insurance

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Submitted By clare300311
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A Report for Anna Yang to show the risks of buying a house on Trent Road, Beeston, Nottingham, NG9 1LQ

Introduction
Flood insurance is becoming increasingly popular here in the UK, as flooding is becoming more common in specific areas, given the climate change recently. There are many reasons for floods, such as river bursting its banks, an example being the houses near the Thames river being prone to flooding due to the likelihood that it could burst it banks after a period of heavy rainfall. Problems like this can occur up near Trent Road, Beeston as it is near the River Trent, so I am writing this report for Anna Yang so she can think about what factors to take in account when thinking about buying a house.

Should Anna be worried about the risk of flooding on Trent Road, Beeston?
According to the Environment Agency, (Environment Agency, 2014) Trent Road in Beeston is located in a Flood Zone 3 area, which means the yearly probability of the river flooding is 1 in 100, or greater than 1%. If Anna were to stay in the house for ten years, it would have a probability of flooding ranging from 9.6% to 28.5%. (Diacon, S. 2014) The probability is expressed as a range due to the fact that it would always be uncertain to some degree as the climate change in the UK changes so regularly, and also flood risk simulation model that the Environmental Agency use has some uncertainty too, as it too is dependent on the climate, and how often it rains, so they can warn people to take action or not. In comparison, insurance companies would also have information about the risk flooding on Trent Road in Beeston, as it may be possible for them to buy the data of Environment Agency. However, this data is in ranges as some people may find it difficult to think probabilistically. (Diacon, S. 2014)

If a typical house on Trent Road, Beeston was flooded, then Anna would need to become prepared for the damages if Anna didn't have flood insurance. The clean up process would be a huge process, so if Anna knew that Anna were going to be living near a flood prone area, then flood insurance would be vital not only for Anna to save money, but also for to make everything a little bit easier for Anna. However, without it, Anna will have to end up paying for drying the house after it was flooded, the repair to the damage of furniture and fixture and fittings, removing the debris, and alternative accommodation Anna will need while she can not live in her home. (Money Advice Service, 2014) However, even with flood insurance, there are some things Anna won't be covered for such as replacing all Anna's damaged belongings, it will depend on the type of contents insurance Anna have. If Anna haven't got flood insurance, and depending on where Anna are, the expected flood loss can range from £375 to £1238 per annum. (Diacon, 2014) The amount that one pays for the insurance would depend on how risk adverse the person is. A person who is risk adverse is amount that someone dislikes risk, and is willing to pay to get rid of it, so someone who is risk adverse is more likely to pay more for insurance than the expected loss. The more risk adverse someone is, the greater the risk premium is, which is the amount they are willing to give up in return for certainty (Diacon, 2014).

What factors should she take into account in deciding whether or not to buy insurance cover for flood risk?
It is very common that flood insurance sometimes is 'bundled' with building insurance. Having a 'bundled' system would mean that having flood covered will only be available if something else was covered as well, such as fire or theft. Bundle packages are becoming increasingly popular here in the UK, because it covers a number of different aspects, not only just one, and most of the time it turns out cheaper by purchasing them all at once, rather than one at a time. An example of this would be building and contents insurance, it is known to be 10% cheaper if purchased in a bundle. (Diacon, 2014). It is possible for the price of flood insurance to increase over the years, depending on how many floods occur during this period.

As it is very expensive for repairs, and the dry up after a flood it would be very important to have insurance for Anna's home. Most mortgage companies usually encourage people to take out 'bundled packages' so building and flood insurance can be included in one (Diacon, 2014). However, given the history near the River Trent, it is known that there have been floods nearby before, the most memorable year being 1947 where nearly 10000 homes in Nottingham were destroyed. (The Environmental Agency, 2012) It will also depend on what Anna's background is to purchase the flood insurance. As she is definitely buying the house, it will completely reliant on her. If she was renting, she would not have to worry as this responsibility would be up to the landlord. One other thing is if she is buying a house for the first time, she will be able to have a mortgage. This will allow Anna to buy a house, because without this insurance she wouldn't been allowed the mortgage, and therefore the insurance. On a buildings and content joint insurance, there are many factors that can contribute towards the size of deductible or excess that they are likely to choose. In a high risk area, the demand would be higher so there would a smaller excess, the same would occur if it was a risk adverse person.

Based on the results of the ABI Association of British Insurers calculator, an average house costing £120000 on Trent Road in Beeston, would cost £145000 to rebuild after a catastrophe such as a flood or a fire. This is assumed that there are 100 square metres of floor area, and built in 2000. The rebuild value are most likely to be more expensive than the original market value, so it might be very important for Anna to get flood insurance, so save this money.

What factors might affect the availability and likely price of insurance against flood risk in the next three years?
The Environmental Agency introduced 'The Nottingham Left Bank flood scheme' around in 2005, after the floods in 2000. The scheme itself it worth £45 million, and can decrease the risk of flooding in 16000 homes in Nottingham, stretching 27 kilometres along the River Trent. Some measures which have been taken to try and stop this in Beeston include raising the flood gate on the Beeston canal, raising 700 meters of existing flood wall as well as building an additional 200 metres of a new flood wall. (The Environmental Agency, 2014) Despite this, there are more things that could be done to try and reduce the risk, such as signing up for flood warnings, and maybe installing 'flood proof' products, like flood boards that could keep the water out of homes, and joining a flood action group. Before Anna and other residents of Trent Road decide to do this, they might like to check out what is being done locally with flood defence first, to see if it is worth doing first. Despite this, no matter what actions you take, it might not be possible for households to completely avoid this, so one of the safest things it is best to do all the time is to make sure that the you are flood insured.

As flooding is becoming more of an issue today, this means that more people are now purchasing flood insurance regardless to whether they need it or not, which then decreases the opportunities by existing customers.…...

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