Yesterday’s announcement of a Memorandum of Understanding between insurers and the Government on the industry’s Flood Re framework is a positive step towards a sustainable, long term, market-led framework for UK flood insurance.
Aidan Kerr’s blog puts this in context, and explains that although much has been achieved, there is a still long way to go to get it working in practice.
Here's what Flood Re could ultimately mean for insurance customers, whether you are at high or low flood risk.
Ever since this process kicked off with a Government flooding summit in September 2010, when it was agreed that the existing Statement of Principles agreement would not be renewed, the aim has been to deliver availability and affordability to customers who live at high risk of flooding. At that time the ABI set out to develop a framework that would do just that, and this model has been challenged, tested and tweaked ever since to form the Flood Re proposition as it is today.
So what are the key principles of Flood Re that will make a difference to consumers?
- There will be no significant change to the way you access home insurance. Flood Re is designed to be a reinsurance facility. This means that an insurer still sells you home insurance, enters into a contract with you, and handles your flood claims as normal. If you are a high flood risk customer an arrangement between your insurer and Flood Re will sit behind this – basically the insurer will give the flood element of your premium to Flood Re, and in return Flood Re will reimburse the insurer for any flood claims you make.
- High risk households will return to an open and competitive market. One of the most significant advantages of putting Flood Re in place is that an insurer will always have an option, should they wish, to use Flood Re for the flood element of your policy. In doing so they transfer both the risk and the premium income to Flood Re, meaning that the incentive for an insurer to decline cover because of the risk of flooding is removed. So we expect Flood Re to open up the market to high risk homes, giving them the opportunity to shop around and enjoy the benefits of a competitive market.
- High risk households will benefit from affordability. An open and competitive market is meaningless if the prices charged to high risk households are unaffordable. Flood Re tackles the affordability problem by allowing insurers to cede any flood policy at a set price (agreed by industry and Government to be generally affordable). In a competitive market, this set price should feed through to the premium you pay as the customer. Of course affordability is not a constant, so Flood Re’s set prices will vary based on Council Tax band (or similar data in Wales, Scotland and Northern Ireland).
- The insurance industry will ‘top up’ the Flood Re fund in the form of a levy. So far, Flood Re will have ‘set’ flood premiums coming in and flood claims going out. Because the premiums are capped at affordable levels, we do not expect the premiums to be enough to cover the claims every year. This means that a second source of income needs to ‘top up’ the pot to the tune of £180m each year. So every home insurer in the UK will contribute to the funding of Flood Re, based on their market share in home insurance, and are likely to share the costs amongst all of their customers. This means that even if you are at low flood risk, a small amount of your premium (equating to £10.50 on average) will contribute towards Flood Re. The reality is that this cross-subsidisation has been going on for years under the existing Statement of Principles, as insurers have largely kept premiums down for high risk homes. It is also worth bearing in mind that many homes that have flooded in recent years have not been known to be at flood risk, have been nowhere near a river, or have even been at the top of a hill – so wherever you live, one day it could be you needing the support that Flood Re offers.
- The scheme will target only the households who need it. For this reason Flood Re will not be available to homes in England’s Council Tax Band H or equivalents in Wales, Scotland and Northern Ireland. We also want to avoid incentivising development in flood risk areas – it would be completely wrong to offer subsidised insurance cover to homes built in an unwise location – so Flood Re will only be available, in line with the existing Statement of Principles, to homes first sold before January 1st 2009.
- It allows insurers to easily react to changing circumstances. Flood Re is designed to be dynamic by allowing insurers to make their own judgements about whether they send a flood policy to Flood Re or ‘beat’ the Flood Re price and keep it themselves. This dynamism will maintain incentives on individuals to manage their flood risk (as it could get them out of Flood Re and paying a lower price). On the other side of the coin it allows homes that are thought to be low risk now, but which turn out to be high risk in future, to be incorporated into the scheme without any fuss.
Flood Re is necessarily complex, and is not a perfect solution. What’s more, the huge amount of work it has taken to get to this point will pale in comparison to the efforts needed to get it ‘open for business’ over the next two years. But if and when we do get there, it will be a vital aspect of the UK consumers’ resilience to a devastating, and growing, risk.
Matt Cullen is the ABI's Policy Advisor, Flooding