Making waves

The end of Summer not only signalled the end of long, beautiful, British summer days, but also the ending of the ‘Statement of Principles’ Agreement – a mutual agreement between the Government and the  Association of British Insurers offering households affordable home insurance in return for the Government agreeing to develop new and reinforce existing flood defences.

High tide…

So, as the agreement comes to an end, what does this mean for property owners in the forthcoming gloomy, wet, wintery months?

The answer: Flood Re. This proposal is due to come into force in 2015 and intends to cap insurance premiums. It will gain legal backing through the Water Bill and 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 managed by the insurance industry itself. Essentially, it forms a fund to provide affordable flood cover for high risk properties, funded by a levy on each households insurance premium (around £10.50 per year).

A fish out of water?

Although the aim is to provide a more open and competitive market that enables homeowners to shop around and enjoy greater availability of choice, there are some pitfalls to this scheme as the following are proposed to be excluded:

  • Properties built after 2009;
  • Properties that fall in Band H of Council Tax; and
  • Small businesses.

The thought process behind excluding new homes is to avoid incentivising unwise building in flood areas. Small businesses also fall short of the insurance availability as the Government believes business insurance policies are often bespoke and already priced to risk, as opposed to the household insurance market where a cross-subsidy has historically operated. Flood Re places greater focus on providing support to residential properties as opposed to small businesses. However, excluding small businesses which employ around 14 million people could be costly as finding affordable cover could prove difficult leaving businesses, exposed.

And just to throw water on the fire…

The somewhat reactive approach of Flood Re does not make allowances for climate change nor does it address the cause of flooding. It is anticipated that around 500,000 homes at risk will benefit, but one commentator has raised the fact that the Government’s Climate Change Impact Assessment views the figure to be more like 970,000 during the 2020’s.

Flood Re does what it says on the tin: it offers short term, affordable, support to homeowners in high risk flood areas. However, here is some food for thought. Prevention is always better that cure, therefore, in the long term, the optimum way of securing affordable flood insurance would be to place greater emphasis on flood management. And secondly, to play devils advocate: what if the money in the allocated “fund” is not sufficient to meet future flood demands – will the bill be met by imposing even higher premiums?

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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.