Government Take Positive Step On Flood Insurance
There have been serious concerns that many households at high risk of flooding will not have access to affordable insurance cover in the future. Properties that are uninsurable become unmortgageable. This has a significant effect on value and takes out 80% of potential purchasers; the economic impact is substantial.
The current voluntary agreement on flood insurance between government and the insurance industry, referred to as the Statement of Principles, was originally due to end in June 2013 and was recently extended until the end of July.
Government has been in negotiations with the Association of British Insurers (ABI) aiming to ensure that affordable flood insurance continues to be available to all. Last week Government announced a Memorandum of Understanding between insurers and the Government for a new flood insurance solution based on their “Flood Re” proposal. They have also launched a public consultation on how it intends to move forward on the flood insurance issue.
Government has stated the following: “Flood Re promises to effectively limit the most that hundreds of thousands of UK households should have to pay for flood insurance. We anticipate that up to 500 000 high-risk households could benefit from Flood Re, and pay significantly less for their insurance than they might otherwise. Customers would be free to shop around to get the best overall deal from an insurer of their choice. As well as limiting the potential for price rises, with some customers seeing prices fall, Flood Re would also constrain the excesses that could be imposed on households at high flood risk.”
The key principles of Flood Re that will make a difference are:
There will be no significant change to the way you access home insurance – Flood Re is designed to be a reinsurance facility. Properties which are considered to be at high flood risk will be assigned to Flood Re, which will arrange for the re-insurance of the properties using the levy fund to pay out on any claims.
High risk households will return to an open and competitive market.
High risk households will benefit from affordability – the maximum cost of flood insurance for any property within Flood Re will be linked to its council tax band.
The insurance industry will ‘top up’ the Flood Re fund in the form of a levy. Flood Re will have ‘set’ flood premiums coming in and flood claims going out, but as the premiums are capped at affordable levels another source of income is needed to ‘top up’ the pot. Therefore all UK household insurers will have to pay into this pool, creating a fund that can be used to pay claims for people in high risk properties. What is not clear is what happens if there is a catastrophic flood early on in the scheme overwhelming the pot; who will be topping it up then?
It allows insurers to easily react to changing circumstances – it is designed to be dynamic by allowing insurers to make their own judgments about whether to send a flood policy to Flood Re or ‘beat’ the Flood Re price and keep it themselves.
Beware – as currently proposed Flood Re will not be available to properties in council tax Band H, any property built after 2009, commercial property and any genuinely uninsurable properties. It not clear yet whether mixed use properties will be covered by the scheme. It is also likely that the fund will not be open to those outside of high flood risk areas. Therefore it is possible that those living in areas that do not slot directly into this category – but are still at substantial risk – will receive minimal cover, if that. This could prove an enormous issue for those affected.
Flood Re is complex and there is a lot more detail to be worked out before it is operational in June 2015. However, importantly most Insurers have agreed to continue to meet their commitments under the Statement of Principles until such a time as Flood Re can begin operation which is good news for property owners.