Affordable flood insurance scheme launched, but prevention efforts still required, says expert

Out-Law News | 07 Apr 2016 | 1:26 pm | 2 min. read

The launch of an industry-backed scheme to ensure that homeowners in areas at risk of flooding can continue to obtain affordable home insurance does not absolve the UK government of responsibility for shoring up the country's flood defences, an expert has said.

Manoj Vaghela of Pinsent Masons, the law firm behind Out-Law.com, was commenting in the week that Flood Re became available to home insurers nationwide following regulatory authorisation by the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA). The scheme, which is funded through an industry levy and backed by £2.1 billion in reinsurance cover, is expected to support an estimated 350,000 properties in areas at risk of flooding in its first year.

"The launch of Flood Re is positive news, given the ever-increasing need for residential properties and consequent developments of sites near flood plains," Vaghela, an insurance law expert, said. "The public should hopefully be able to shop around for cheaper premiums as experienced insurers will take advantage of the security provided by Flood Re to rate risks and offer competitive quotes."

"Importantly, this development does not absolve local authorities and the Environment Agency of their responsibilities with maintaining flood defences. It is a consumer-led initiative to protect the general public, but significant efforts will still be required to shore up flood defences and to plan for flood events. The government needs to engage further with insurers and actuaries to assess where the risks lie and to develop further flood-prevention measures," he said.

Flood Re was developed by the UK government and Association of British Insurers (ABI) to replace the industry's existing voluntary commitment to affordable home insurance in areas at risk of flooding, known as the 'Statement of Principles'. Flood insurance premiums for eligible householders are capped under the scheme at a level based on council tax banding, with the remainder of the risk instead covered by an industry levy. This is expected to be passed back to all consumers at an estimated £10.50 per annual premium – effectively, a cross-subsidy of high-risk properties by low-risk properties.

More than 20 banks, insurers and brokers are currently offering Flood Re policies to homeowners, with more expected to sign up soon, according to the company. Homeowners with Flood Re policies will continue to deal directly with their insurers in the usual way. Insurers will decide whether to pass the flood risks associated with specific properties to the scheme, which will then pay out on flooding-related claims for those properties.

Houses built since 2009 and buy-to-let properties insured by their landlords are excluded from the scheme, which is expected to last for 25 years and required by statute to move towards "risk-reflective pricing" over that period. Business properties are also excluded from the scope of Flood Re.

In a statement, the ABI said that householders should not feel under pressure to take action following the launch of the scheme as its benefits would "develop over time". However AXA, the home insurer, has said that it will contact eligible customers directly to inform them of the benefits of the scheme and encourage them to switch to a Flood Re-backed policy for no additional charge.

Flood Re chief executive Brendan McCafferty said that the scheme would give consumers in flood risk areas "greater choice and more competition" when shopping for a policy.

"Consumers should check the Flood Re website to see which insurers are signed up, speak to their current insurer and be prepared to shop around," he said. "When buying a policy they should make sure it is the best one for them, not just the cheapest."