How does Flood Re home insurance work?
Access to affordable home insurance is critically important when it comes to helping households recover from the severe financial impacts and damage caused by flooding.
With the UK experiencing a dramatic increase in extreme rainfall and unpredictable flash flooding in recent years, home insurance for dwellings considered to be in areas of high flood risk can often be an unaffordable expense. However, as it is estimated that the fully drying out and carrying out of repair works to homes that have suffered flood damage is anywhere between £20,000 and £45,000, it is clearly a necessity. Flood Re is a pioneering joint venture by the insurance industry and Government, designed to help people who live in areas of high flood risk to obtain affordable home insurance.
Available since the 4th April 2016, the Flood Re scheme is endorsed by both the Government and the Association of British Insurers as a system of securing insurance for homes considered to be at high risk of flooding. It is estimated that over 350,000 homeowners could benefit from Flood Re with access to more affordable home insurance policies.
Born out of the Water Act 2014, Flood Re is a reinsurance scheme which works by allowing insurers to insure themselves against losses caused by flooding. The scheme is not an insurer itself, meaning that customers do not deal directly with Flood Re, but works behind the scenes with insurers to effectively take the flood risk element away from the insurer. So, in practice, when the cost of the flood risk part of a policy becomes unacceptably high, it may make commercial sense for the insurer to pass that part of their policy to Flood Re. Unlike other reinsurance companies, Flood Re operates on a not-for-profit basis. Claims are paid out of a central pot, funded by the cost of the policies plus a levy of £180 million on the insurance industry
Detailed eligibility criteria for homeowners can be found on the Flood Re website and as with anything, the devil is in the detail. Although the majority of properties in high flood risk areas will be eligible to benefit under the scheme, there are some exceptions. For example, properties built after 1st January 2009 are excluded in an effort not to incentivise the building of new homes in high flood risk areas. Flats in leasehold blocks containing four or more homes are also excluded. Only residential properties in Council Tax bands A-H will qualify; businesses are not included. A further stipulation is that the policy holder must live in the property, so landlords living elsewhere will not qualify. Such ineligible properties will still be subject to market-driven premiums and excesses for flood cover. It is therefore recommended that prospective buyers are prudent when it comes to flood risk, establishing first whether the property is at risk of flooding and if so, whether it is eligible for Flood Re. If the property does not meet the Flood Re criteria, prospective buyers should check what flood insurance cover is available, ensuring that the terms and cost are acceptable.
Although the scheme is designed to be short-term, with a fixed life time of 25 years, the long term goal is to allow a gradual industry transition towards more risk-reflective prices. It is anticipated that throughout the 25 years of the scheme, insurers will be able to offer more affordable home insurance to homeowners in areas of high flood risk. It is hoped that by the end of Flood Re’s lifetime, this will mean a more competitive marketplace with more choice and less prohibitive premiums even without the £180 million subsidy.
However, whilst the aim of Flood Re is clear enough, how well it will work in practice is less so, with some believing that the insurance industry is not ready to support such a scheme and will not succeed without the levy funding it. The legislation that established Flood Re imposes a statutory duty on the scheme
to publish a transition plan, setting out how the market will achieve more risk-reflective prices which it has done. However, the statute does not stipulate what ‘risk-reflective pricing’ is and it has been argued that, in practice, this could mean the same unaffordable premiums and excesses as today. The Board of Flood Re ardently disagree stating that the best outcome of the scheme is that premiums will remain lower than today as the cost of flooding falls. However, this will only materialise by reducing the frequency and severity of flooding, through Government plans to invest heavily in flood defences and making properties more flood resilient. Flood Re will only be a success in the long term if these plans come to fruition. It should also be noted that Flood Re has its own reinsurance scheme to cope with an influx of large and unanticipated claims.
“It’s recommended that prospective buyers are prudent when it comes to flood risk, establishing first whether the property is at risk of flooding and if so, whether it is eligible for Flood Re”
How does Flood Re work?
- Flood Re will collect an annual tax from home insurers which will contribute to a central pot of £180 million.
- Homeowners can insure their homes with a participating insurer so the high flood risk is passed on to Flood Re. A list of insurers can be found on the Flood Re website.
- Flood Re take responsibility for the flood risk element of the policy and will reimburse insurers when a valid claim is made.
More information on eligibility and Flood RE insurers at www.floodre.co.uk