Consultation launched on Flood Re regulations but plans labelled 'unworkable' by insurers

Out-Law News | 24 Jul 2014 | 11:09 am | 2 min. read

New draft regulations that would implement the Flood Reinsurance (Flood Re) Scheme are being consulted on by the UK government.

The Department for Environment, Food and Rural Affairs (Defra) has proposed three sets of regulations that it said will "enable the insurance industry to implement Flood Re next year".

However, insurance industry body the Association of British Insurers (ABI) warned the proposals were "unworkable" as currently worded.

"The draft regulations are critical to how Flood Re will operate in practice," said Huw Evans, deputy director general and director or policy at the ABI. "Despite the fact that in discussions we have made some progress, the current draft rules on the financial management of Flood Re are not agreed with the industry and would be unworkable if passed into law in the current state."

"It is critical that these issues are fixed during the consultation phase in the coming months if we are to deliver a privately-run but publicly accountable Flood Re which can work smoothly for the benefit of customers in high -risk flood areas and succeed in gaining regulatory authorisation as a sustainable insurance vehicle," Evans said.

Flood Re is a scheme that the ABI and the UK government agreed to introduce to place a cap on householders' flood insurance premiums. The level of cap will vary across different areas and will be set accordance to the council tax band of each domestic property.

Claims made by people in homes at high risk of flooding would be funded through an industry-backed levy, which would be passed back to consumers at an estimated cost of £10.50 on annual premiums, with low risk properties in effect cross-subsidising high risk properties. The cross-subsidy currently exists under the statement of principles that insurers have volunteered to observe until the Flood Re scheme comes into effect.

For Flood Re to come into force, new regulations must be passed to flesh out the detail of the scheme which is otherwise provided for under the Water Act passed earlier this year.

The draft Flood Reinsurance Scheme Funding and Administration Regulations 2015, Flood Reinsurance Scheme Administrator Designation Regulations 2015 and Flood Reinsurance Scheme Designation Regulations 2015 are open for consultation (24-page / 556KB PDF) until 16 September. They "cover the legal framework around the Flood Re Scheme, its funding and its administration", Defra said. It is intended that the rules would come into force on 6 April next year.

The regulations enable the government to establish Flood Re and designate a body to administer the scheme. They also set out detail of how the individual levy that insurers will have to pay to the administrator of the scheme will be calculated and the circumstances in which an additional levy could be imposed. Initially an annual levy on industry will total £180 million.

The regulations also lay out the extent to which insurers will be charged for reinsurance premiums on the individual policies they issue with a flood risk element associated.