The agreement removes the threat that many properties in high risk areas might become uninsurable. But it will not affect the cost of cover or policy terms, which will continue to reflect the level of risk presented.
Around 55,000 properties were flooded and nearly half a million people were left without mains water or electricity in June and July 2007, causing the largest peacetime emergency in England since World War II, according to the Pitt Review published last month.
The deluge gave rise to at least 180,000 insurance claims, for which the insurance industry expects to pay out over £3 billion. Other substantial costs will have to be met by central government, local public bodies, businesses and private individuals.
In June this year, the Association of British Insurers (ABI) warned that half a million homes at significant risk of flooding could become uninsurable unless the Government took action.
But on 11th July, in a joint statement with the Department for Environment Food and Rural Affairs, the ABI confirmed that its members will provide flood cover as standard in insurance policies for homes and small businesses if the flood risk is not significant (no worse than a 1.3% annual risk).
Insurers will also continue to provide cover for existing customers who are at significant flood risk, providing there are plans to reduce the risk to an acceptable level within five years.
In return, the Government has agreed to take various measures to improve flood risk assessment and reduce flood risk.
These include putting in place an investment strategy which will set out short, medium and long term strategic flood prevention aims and assess future policy options, funding needs and the allocation of resources.
Over the long term, the Government and the insurance industry will work together to improve understanding of flood risk from all sources, including surface water which was a significant feature of the 2007 floods.
Another stated aim is to raise public awareness in areas of high risk and promote access to home insurance for low income households.
This relates to a concern raised by the Pitt Review that flood risk is not understood by most people. The report recommended a programme of education and publicity to encourage householders to take sensible precautions, such as insurance, and the wider use of schemes to help low income households afford flood cover.
The Government's detailed response to the Review is due to be published in the autumn. By January 2009, the Environment Agency will have drawn up a more accurate National Flood Risk Assessment for river and coastal flooding, to be reviewed on an annual basis.
Next spring, the Government will introduce its draft Floods and Water Bill and, by March 2009, it promises to carry out an evaluation of planning policy for flood risk.
Announcing the agreement last week, Flood Minister Phil Woolas said: "The devastation caused by last year's unprecedented rainfall has shown just how vital it is for people to be able to insure their homes and livelihoods against the risk of flooding."
"Working together we have succeeded in ensuring that flood cover is available in both the short and long term. I am delighted that the industry has agreed to work with us to raise awareness and encourage homeowners to take steps to protect their homes where appropriate," he said.
Stephen Haddril, the ABI's Director General said the agreement is good news for everyone at risk of flooding.
"We are pleased the Government recognised that a long term investment strategy, adequately funded, is the best way to manage the growing flood threat," he said. "It will help ensure that the flood insurance protection relied upon by millions of householders and businesses remains widely available."
The ABI's commitments are set out in a revised statement of principles, which will remain in place until 30th July 2013.