In 2011, the industry formally recommended Flood Re as a long-term flood insurance solution in the UK and after lengthy negotiations an outline agreement between the Government and the insurance industry was reached in June 2013. Since then the industry and Government have been working through the finer detail, and the Water Bill, legislating the powers to set up Flood Re has been working through Parliament. Royal Assent for the Water Bill was gained in May 2014. The Secondary Legislation which comprises of the regulations and the Scheme document, were laid before parliament in April 2015. This paves the way for the Secretary of State to designate Flood Re as the scheme administrator of the Flood Re scheme which we expect to happen after the election.
What is Flood Re?
The Flood Re scheme will be a not-for-profit flood reinsurance fund, owned and managed by the insurance industry, and established to ensure that those domestic properties in the UK at the highest risk of flooding can receive affordable cover for the flood element of their household property insurance.
Reinsurance is a way for insurers themselves to insure against large scale losses with other insurers. Insurers sell policies to their customers in the usual way, but then may pass the risk carried by those policies to a reinsurance company, or reinsurance vehicle – like Flood Re – where those risks are pooled into a fund which pays out to the insurer if claims are made. The contractual responsibility for paying out to the customers if a claim is made still rests with the original insurer – but they have their own back up from the reinsurance pool which they can claim against. This helps insurers take on more risk as the consequences of large claims are more widely spread.
A comparable, albeit different, scheme is Pool Re which covers insurers for loss incurred by terrorism and where some insurers choose to reinsure policies sold in case the losses are very high. This was set up in the 1990s after the IRA bombing of the City of London made insuring commercial risk prohibitively expensive.
How does it work?
Insurers will sell insurance in the normal way, and have an incentive to compete for the business of customers with high flood risk because they know they can pass the flood component element of the policy into Flood Re. The flood element of a home insurance policy will be placed in Flood Re, based on Council Tax band Insurers will use this facility for the 1-2% highest risk homes – an estimated 350,000 homes – that would have struggled to find any affordable cover in a normal market. If they are flooded those customers will deal with their insurer in the usual way to get their claim paid and Flood Re will reimburse the insurer behind the scenes for the cost of the claim.
Who is paying for it?
The insurance industry is paying the £10m set up costs to get Flood Re up and running. The Flood Re pool itself has two sources of income. The first is the flood element of the policies which are passed into it. The second is an additional levy on the industry, equivalent to the existing cross-subsidy that exists in the market.
What does the scheme mean for customers? Will insurance premiums be capped?
Insurers will still be in control of pricing for overall home insurance. Flood Re will charge a fixed premium per policy to insurers, relating to the flood element of the policies transferred to Flood Re.
These premiums will be lower than would be the case if the flood risks were fully taken into account, as contributions to the costs will come from a statutory levy on all home insurers in the UK. Flood Re also offers insurers an excess per policy of £250. Although Flood Re has no control over the way insurers set the excesses for individual customers, this mechanism should benefit people living in areas at risk of flooding.
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?
The Flood Re levy is a new charge on insurers based on market share. Insurers will now be eligible to cede selected properties to Flood Re, but will continue to decide on the overall premium charged to individual customers as usual. Better information is now available that shows many people are potentially at flood risk from flash flooding, for instance, and not just people living near a river or the sea. Having property insurance that includes flood cover is usually crucial in getting a mortgage. So if flood insurance was to become harder to obtain and more expensive, this could have serious repercussions for the whole property market.