The ABI and the Government have agreed a Memorandum of Understanding (MoU) on how to develop a not-for-profit scheme - Flood Re - that would ensure flood insurance remains widely affordable and available. The MoU is a first step towards establishing Flood Re, and confirms it as the Government’s preferred option.
Q. In a nutshell what have you announced?
A. An agreement in principle between UK insurers and the Government to develop a not-for-profit flood fund – known as Flood Re – to ensure that flood insurance remains affordable and available to homeowners at high flood risk. There is much detail to work through, but we have in place a framework agreed with the Government on which to proceed.
Q. Why is this necessary? Why could insurers not simply continue to follow the Flood Insurance Statement of Principles that has been running since 2000?
A. The Government and others agreed with us that the agreement has become unsustainable and that a new approach was needed to safeguard affordable and widely available flood insurance in the UK. The Statement was only ever intended to be a temporary measure, and has restricted customer choice as insurers only have commitments to their existing customers, and new insurers can decide to whom they offer flood insurance. The Statement also does not guarantee affordable flood premiums or manageable excesses, and despite it an increasing number of people are beginning to struggle to afford flood insurance.
Q. How will this new scheme work?
A. It will provide a fund to offer people at high flood risk who might otherwise struggle to get affordable flood insurance with cover at a set price. Insurers will put into the fund those high flood risk homes they feel unable to insure themselves, with the premium to cover the flood risk part of the household premium capped.
As a customer you will not notice any difference as you will continue to be insured by your usual insurer.
The cap will be based on Council Tax bands, starting at no more than £210 per annum in Bands A and B, rising to £540 pa in Band G. The capped premiums will go into the fund to help pay flood claims. So if you are at flood risk you know that the cost of your flood insurance will be limited.
To help fund this, all home insurers will collectively be subject to a levy. On average this works out at £10.50 a year on all home insurance policies. Homeowners already pay this, as some cross-subsidy has always existed between lower and higher flood risks.
Q. When do you expect the scheme to start?
A. Assuming various implementation issues are resolved, the aim is for it to be ready for business in summer 2015.
Q. What happens in the meantime?
A. While work to develop this scheme happens, ABI members will voluntarily continue to meet their commitments to their existing customers under the old Statement of Principles agreement. This means they will continue to offer cover to existing customers where flood risk is not ‘significant’ according to the Environment Agency, or where the Government has announced plans to reduce flood risk below ’significant’ within five years. The premium and excess will reflect the insurer’s understanding of the flood risk.
Q. I am at low flood risk, so why should I have to pay the levy on my home insurance so that someone at higher flood risk can get affordable flood insurance?
A. The levy has been calculated to reflect the existing cross-subsidy between those at lower and higher flood risk. And better information now available shows that many people are potentially at flood risk, from flash flooding for instance, and not just people living near a river or the sea. Also, having property insurance that includes flood cover is usually crucial in getting a mortgage. So if flood insurance becomes harder to obtain and more expensive, this could have serious repercussions for the property market.
Q. What happens if there is a large flood in the early years of the scheme – will there be enough money in the fund to pay claims?
A. Flood Re will be designed to fully cover at least 99.5% of years. Even in the worst half a per cent of years, Flood Re will cover losses up to those expected in a 1 in 200 year – a year six times worse than 2007 – with Government taking primary responsibility-working with the industry and Flood Re-for distributing any available resources to customers should claims exceed that level.
Q. Why, when the scheme is operational, will it not cover a large-scale flood loss above a 1 in 200 year probability? Who will help me if I am flooded in these circumstances?
A. A flood of this severity is very unlikely-it would need to be six times worse than the flooding in 2007, which was described as the biggest peacetime civil emergency since World War 2. The Government recognise that the Flood Re scheme is not designed to cover ‘catastrophic’ flood events, and in such unlikely circumstances the Government would have primary responsibility for an effective response.
Q. Will all properties be covered by the fund?
A. Flood Re is designed to provide support to those who need it most and will cover homes. Homes in the highest Council Tax band H in England, and equivalent properties in Scotland, Wales and Northern Ireland will not be covered by the scheme. Homes built after 1 January 2009 will not be covered (as applied under the old Flood Insurance Statement of Principles) - this is to avoid incentivising unwise building in flood risk areas.
The individual nature and assessment of business risks means that available and affordable flood insurance is less of an issue than for homes. Flood Re would establish clear rules for ‘borderline’ cases such as ‘Bed and Breakfast’ properties.