Victory for insurers as government chooses Flood Re

The ABI and the government have agreed to implement Flood Re as a replacement for the expiring Statement of Principles.

The plan is to have the scheme in place by summer 2015.

The insurance trade body and the government have signed a memorandum of understanding (MoU) on how to develop Flood Re, a not-for-profit solution that will allow insurers to continue to cover high-risk homes.

The ABI said the MoU is the first step towards implementing Flood Re, under which a central pool of funds, contributed to by insurers, will pay for the flood risk element of insurance for high-risk homes.

Flood Re was the industry’s preferred solution, but there were also rival proposals such as Marsh’s Project Noah.

The agreement follows years of wrangling about what would replace the Statement of Principles, which expires on 31 July following an extension.

Under the statement, insurers agree to offer affordable insurance to homes at a high risk of flooding in return for government spending on flood defences.

ABI director General Otto Thoresen said: “Insurers’ priority has always been to ensure that flood insurance remains affordable and available for everyone who needs it. Today’s announcement is the start of a process that aims to deliver affordable flood insurance to high flood risk households.

“Getting to this stage has required compromise by both sides and there remain issues that need to be overcome.

“For Flood Re to be established successfully there needs to be an unprecedented level of partnership between the government and the industry. But insurers and the government are now working towards a shared vision, with Flood Re as the government’s preferred choice.”

“Flood Re would be a major undertaking for UK insurers and the work insurers have undertaken to get here reflects the industry’s desire to cover flood risk at an affordable price in the face of the increasing flood threat in the UK. The hard work now begins for both sides if we are to make this vision a reality.”

Environment secretary Owen Paterson added: “Flooding is terrible for anyone affected by it. We have worked extremely hard with the industry to reach an agreement on the future of flood insurance. There are still areas to work through but this announcement means that people no longer need to live in fear of being uninsurable and that those at most risk can get protection, now and in the future.”

The decision has been welcomed by insurers. Ageas UK chief executive Andy Watson said: “Ageas welcomes the announcement as a first step and is committed to working in partnership with the government and ABI in the best interest of customers.

“It’s taken a while to get here and there is much more to do but we believe it’s the right decision and together with a commitment to continue investing in flood defences, will support those communities most in need of support.”

Flood Re details

Flood Re will be run and financed by insurers as a not-for- profit fund which will cover the cost of flood claims from high risk homes.

Insurers will pass the flood risk element from those households deemed at high risk of flooding to the fund. Premiums for the flood risk will be calculated based on council tax banding up to a maximum limit depending on the band.

Flood Re would charge member firms an annual charge of £180m.This equates to a levy of £10.50 on annual household premiums and represents the estimated level of cross-subsidy that already exists between lower and higher flood risk premiums.

Flood Re will be designed to fully deal with at least 99.5% of years. Even in the worst 0.5% of years, Flood Re will cover losses up to those expected once in every 200 years – a year six times worse than 2007. The government will take primary responsibility – working with the industry and Flood Re – for distributing any available resources to Flood Re policyholders should claims exceed that level.

Providing operational issues, including governance and regulatory approval, are resolved, the aim is for Flood Re to be up and running by summer 2015, with regular progress reviews taking place to ensure Flood Re can proceed.