Dr Eli Krull, a researcher at the Manchester Institute of Innovation Research at the University, has co-authored a teaching case on the organisational paradox of affordable housing insurance in flood-prone areas in the UK. This case is part of a series of teaching materials published by the European Forum on Paradox and Pluralism, which aims to contribute to the development of paradox management competences by producing teaching materials on management tension and paradox.

The case describes how managers at Flood Re, a not-for-profit reinsurance scheme that was established by the UK government, and the UK insurance industry, worked through the paradoxical remit of enabling affordable housing insurance in flood-prone areas with the aim of returning the risk to the market after a set period of time.

In the UK, houses that are located in areas that have been flooded multiple times face rising insurance premiums which often makes insurance unaffordable for homeowners. This results in an ‘insurance protection gap’ in which people who are highly exposed to a particular risk cannot afford to get insurance to pay for their losses.

The purpose of insurance is to protect individuals or organisations against financial losses that are caused by a pre-agreed event (such as fire, flooding, or illness). Insurance and reinsurance firms can offer such protection because they operate at a scale that allows them to pool the risk; that is, they collect premiums from the many that can be used to pay for the losses of the few. While this model generally works well where insurance firms can distribute the risk, insurers, in order to meet solvency requirements, engage in ‘risk-reflective pricing’. This means that the price of a premium should reflect the risk of losses. When events become severe and frequent, such as with repeated flooding, insurance premiums may become unaffordable for policyholders at high risk of flood, due to risk-reflective pricing.

The teaching case of Flood Re raises a number of interesting questions:

• What do you think about subsidies across the collective set of policyholders as a means of addressing unaffordable insurance for some individuals at high risk of loss?
• In what other ways can the tensions of risk-reflective pricing and affordability be addressed?
• Do you see any longer-term problems or paradoxes that Flood Re might need to address arising from their notion of affordable risk-reflective pricing?

By thinking about these questions within the context of the paradox at hand, you can begin to understand the complexities of affordable housing insurance in an environment, in which floods become an increasing concern due to climate change, as well as the costs associated with inaction on this issue.

• Read the full case here: Living the paradox of protection: The case of Flood Re
• Take a look at the other teaching cases of this series here: Paradoxes of management and organization: Short cases for pedagogical use