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The future of flood insurance: what happens next

The ABI and the Government agreed a Memorandum of Understanding (MoU) in June 2013 on how to develop a not-for-profit scheme - Flood Re – to allow flood insurance to remain widely affordable and available, while allowing a sustainable transition to risk reflective pricing over 25 years. The MoU was a first step towards establishing Flood Re, confirming it as the Government’s preferred option to ensure the continued availability of flood insurance to flood risk households.

Q. What is Flood Re?

A. An agreement between UK insurers and the Government to develop a not-for-profit company – Flood Re – to allow insurers to pass the flood risk element of a home insurance policy into a fund that will pay any subsequent flood claim. It is designed to enable high flood risk households to obtain affordably priced flood insurance.

Q. Why is Flood Re necessary? Why could insurers not simply continue to follow the Flood Insurance Statement of Principles that has been running since 2000?

A. In face of the rising flood risk, we have estimated that between 300,000 – 500,000 flood-risk UK households would struggle to obtain affordably priced flood insurance without a scheme like Flood Re
The Government and others agreed with us that the Flood Insurance Statement of Principles established in 2000 had become unsustainable and that a new approach was needed to help flood risk households obtain affordable flood insurance. The Statement was only ever intended to be a temporary measure, and restricted customer choice as insurers only had commitments to their existing customers, and new insurers can decide to whom they offer flood insurance.

Q. How will Flood Re work?

A. It will provide a fund to enable insurers to pass the flood risk element of home insurance (buildings and contents) at a premium that will be capped depending on the property’s Council Tax band (see below). Flood Re will not set premium rates.Insurers will pass into Flood Re those high flood risk homes they feel unable to insure themselves, retaining the non-flood risks such as fire, theft and subsidence.
 
As a customer you will not notice any difference as you will continue to be insured by your home insurer.

The fund will comprise of two elements. 

Premiums of flood risks passed by insurers, the premiums of which will be capped 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.

Separately, all home insurance customers will pay a levy into the fund. This is not an additional amount (on average £10.50 a year on all home insurance policies) as it broadly reflects the existing cross-subsidy between lower and higher flood risks.  This levy, along with Flood Re’s premium income, will be used to cover the exposure for those high risk homes that insurers pass into Flood Re.

Q. When do you expect the scheme to start?

A. Flood Re is a world first, and the industry is working flat out to set it up. While a complex undertaking it is planned to be open for business in the second half of 2015.

Q. What happens in the meantime?

A. While Flood Re is being developed, ABI members are voluntarily continuing to meet their commitments to existing customers under the old Flood Insurance Statement of Principles agreement. This means they are offering flood 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 not be capped, as they 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 broadly reflects the existing cross-subsidy between those at lower and higher flood risk. So it is not an additional charge on what is already being paid in respect of the 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 will happen to my home insurance premiums when Flood Re starts?

A. Flood Re will not set home insurance premiums. It is designed to allow insurers the opportunity to offer affordable flood insurance to high risk households by allowing the exposure of these risks to be passed to Flood Re at a set premium.
We cannot speculate on any impact the scheme may have on the overall costs of home insurance, the price of which takes into account various other risks including fire, storm, burst pipes, subsidence and (for contents) theft, the overall claims experience of your home insurer, and other factors in a competitive 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 purchase its own reinsurance and hold reserves and capital so that it can fully cover all claims in 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 insurance  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 annual flood loss above a 1 in 200 year probability? Who will help me if I am flooded in these circumstances?

A. An annual loss 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 recognises 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 homeowners  who without it are most likely to face problems in obtaining affordable flood insurance.

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 known high flood risk areas.

Commercial properties, including commercial leasehold properties, will not be included.
The individual nature and assessment of business and commercial property risks means that available and affordable flood insurance is less of an issue than for homes. While some individual firms may experience problems in accessing flood insurance, these can usually be resolved by using (as most do) an insurance broker. Flood Re will establish clear rules for ‘borderline’ cases such as ‘Bed and Breakfast’ properties.

If you live in a commercial leasehold property and you take out contents insurance (buildings cover is usually through the landlord) then the flood risk element can be covered by Flood Re.

Leasehold blocks with three residential units or less will be eligible for Flood Re providing the freeholder responsible for purchasing the buildings insurance lives in the block and the building meets the other required eligibility criteria.

Q. What have the Government committed to do?

A. The Government has committed to a specified level of flood defence spending for 2015/16 following the Government’s spending round in June 2013. They will also ensure adherence to planning guidelines to avoid developments in areas at high risk of flooding.

Last updated 08/01/2015