Will UK flood insurance ever be settled?

The future of UK flood insurance has been cast into further doubt after talks between insurers and the government to find a replacement to the Statement of Principles broke down.

With the current agreement expiring on 1 July 2013, the deadline for a replacement to the Statement of Principles is fast approaching and yet there appears to be no solution in sight.

Under the current agreement, insurers provide affordable flood cover for homes and small businesses in flood-prone areas on the condition that the government spends a certain amount on flood defences.

The latest sticking point is about an overdraft facility for a proposed flood insurance fund for 200,000 high-risk households, which the government has refused to consider.

But the breakdown in talks comes as no great surprise given that the government was never in favour of the ABI proposals.

Given last week’s heavy downpours that left large parts of the UK flooded, and more rainfall expected over the next two days, the call to action has become even stronger.

Possible solutions

The ABI has urged the government to commit to a joint flood insurance solution.

But if the ABI’s Flood Re solution, which proposes the pooling of flood risks that cannot get affordable cover on the open market by insurers, is a non-starter, what are the alternatives available with the clock ticking down?

Project Noah, another pooling solution put forward by Guy Carpenter and sister insurance broker Marsh, is still on the table.

Noah, which was unveiled in November last year, would result in the pooled flood risks covered by the insurers being transferred to the global reinsurance market.

Despite concerns that Noah does not adequately address the issue of helping cash-strapped customers in the flooded areas, Marsh claims the plan has insurer and government support.

Another option could be a hybrid model, said to be favoured by the ABI, or an open market solution.

The main problem with the open market approach, however, would be that insurers would likely become more selective about the areas they underwrite property in, potentially leaving hundreds of thousands of policyholders in the most flood-prone areas without affordable cover.

This in turn would impact the mortgage market as more lenders require properties to have insurance as standard.