State of UK Flood Insurance (Part 2)

Holly Deakin contributed to the writing of this blog post

The Statement of Principles was put in place in the year 2000, as a temporary measure to safeguard homeowners who face high flood risk. The recent expiration of this scheme (31st July 2013) is likely to have severe consequences for many of these homeowners, such as being refused insurance renewals and struggling to obtain affordable home insurance.

Since our last blog on the state of UK flood insurance, progress has been made between the Government and Association of British Insurers (ABI) to provide affordable flood insurance to high risk homeowners.

Flood Re

The new agreement, The Memorandum of Understanding (MoU), is the first step in implementing Flood Re. Flood Re is a not-for-profit fund which uses a central pot to cover homeowners that are at high risk from flooding. Insurers will put high risk customers that they believe they cannot insure themselves in the fund and cap the flood risk part of their premium. This cap will be based on their council tax band and varies from £210 to £540 per annum.

The fund will be topped up by adding a levy on all home insurance policies, which the ABI say will average out to £10.50 a year per policy. Many homeowners that are at low risk of flooding may be surprised at having to pay a levy on their home insurance that goes towards funding high risk homeowners. But homeowners have already been paying this, as there has always been some sort of cross subsidy between high and low flood risks. Furthermore, flood risk has become more prevalent now as people are not only subject to the risk if they live near the sea or a river but are at risk from flash flooding.

CAT risk

Flood Re is designed to fully cover at least 99.5% of years. In the event of a catastrophic flood, the primary responsibility of covering the damage falls to the government. An example of a catastrophic flood is one that is six times more severe than the 2007 UK floods, which were one of the worst that the UK had experienced in recent years. The likelihood of such a crisis is 1 in 200, and this would fall outside the scope of Flood Re, hence the final responsibility would fall to the government. Flood Re would only be responsible for paying out the first £2.4bn of claims, after which the government would cover the remaining claims. 

When will the scheme start? Once the scheme is finalised it is expected to start taking place in the summer of 2015. But what will happen in between then and now? ABI members have voluntarily agreed to continue the arrangements of the Statement of Principles, to ensure that cover will still be offered at an affordable rate to high flood risk home owners.

Coverage of Flood Re

Not all homes are covered!  There are exclusions to the coverage (according to the ABI website):

• 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.
• Commercial properties are not included.  Flood Re would establish clear rules for ‘borderline’ cases such as ‘Bed and Breakfast’ properties.