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Is Flood Re making waves for property insurance?By: Melissa Chantrill

Makes insurance waves - Flood ReThe summer of 2013 was one of the warmest since records began in 1910. As the season drew to a close, we not only waved goodbye to the long British summer days, but also to the Statement of Principles Agreement – a mutual understanding between the Government and the Association of British Insurers (ABI).

The contra deal-style agreement offered households affordable home insurance, in return for the Government pledging to develop new flood defences, in addition to reinforcing old or damaged defence mechanisms.

There are multiple national bodies in England, Scotland, Northern Ireland and Wales, which are responsible for carrying out flood risk assessments. These are used by insurers to determine how the Statement of Principles is enforced.

This is an agreement that guarantees insurers will:

  • Renew existing customers’ home insurance if the individual national bodies consider their property not to be at significant risk of flooding.
  • Renew the home insurance of existing customers whose properties are considered to be at significant risk of flooding, provided that the particular national body plans to reduce the flood risk in the area within five years.
  • Continue cover for the new owners of a previously flooded or at-risk property, if the original customer decides to sell.

 High Tide
This legislative agreement ended on 31 July 2013. Given the enormity of flood damage experienced in recent months, what does this mean for business and home owners who are set to struggle throughout wet and wintery months in future?

Legally backed by the Water Bill, the Flood Re proposal is due to come into force in 2015 and intends to cap insurance premiums. The Government will subsequently achieve legal power to regulate the insurance industry, to ensure flood insurance remains affordable in high risk areas. Until then, a Memorandum of Understanding has been negotiated to meet the commitment under the current Flood Insurance ‘Statement of Principles’.

Staying afloat
Premiums will be based on the Council Tax band of each property, ensuring continuity in the market. Flood Re will operate as a not-for-profit scheme administered by the insurance industry itself. Essentially, it will form a fund to provide affordable flood cover for high risk properties, subsidised by a levy on each household's insurance premium (around £10.50 per year).

A fish out of water?
The ultimate aim of Flood Re is to create a more open and competitive market, enabling homeowners to shop around and enjoy greater availability of choice. However, there are some pitfalls to this scheme, as it is proposed that the following properties are excluded:

  • Properties built after 2009
  • Properties that fall into Council Tax Band H
  • Small businesses

The decision to exclude new homes has been made in order to avoid incentivising unwise building in areas that carry a high risk of flooding.

Small businesses also fall short of the insurance availability. This is due to the Government's belief that business insurance policies are often bespoke and already priced to consider such risk, as opposed to the household insurance market where a cross-subsidy has historically operated. Should businesses struggle to find affordable cover, it would be argued that this vast elimination could be extremely costly and leave companies exposed.

Flood Re offers short term, affordable support to property owners in high flood risk areas. However, prevention is always better than cure. Therefore, in the long term, the optimum way of securing affordable flood insurance would be to place greater emphasis on flood management. In addition to this, if the money in the allocated ‘fund’ is not sufficient to meet future flood demands, it’s predicted that the bill will be met by imposing even higher premiums.

The somewhat reactive approach of Flood Re doesn’t make allowances for climate change, nor does it address the cause of flooding. Despite this, it is anticipated that around half a million homes at risk will benefit immediately, and the Government’s Climate Change Impact Assessment views the figure to be closer to 970,000 during the 2020s.

About the author

Melissa Chantrill, real estate solicitor with GateleyMelissa Chantrill is a Real Estate solicitor with national law firm, Gateley.

Features April 2014

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