Critics question misguided Flood Re plan
The tentative agreement between the UK government and the insurance industry on how the risk of flooding at high risk properties will be covered has been cautiously welcomed by the industry. But some suggest the scheme is misguided.
The arrangement, known as Flood Re, would be funded by a levy on every household in the country, while premiums for at-risk homes would be capped at a level based on property value, linking it to council tax bands. The scheme will create a fund that can be used to pay claims for people in high-risk homes.
Rating agency Fitch has welcomed the scheme saying it will remove uncertainty from the market by ensuring availability and increased pricing stability for customers while allowing insurers to balance exposure to high-risk properties.
It notes that risk pools of this type have been successfully adopted in many other European countries. The plan also means customers in high-risk areas will not be forced to remain with their existing insurer. The structure of the last agreement had resulted in some insurers holding a disproportionate number of high flood-risk properties.
“There are still significant challenges in agreeing the detail of the scheme but we believe there is a strong incentive for insurers to find a solution, as the government's fall-back of direct regulation would be much more burdensome,” said Fitch in a statement.
“Regulation would force insurers to take a specific share of high-risk households or face penalties. This would increase costs and limit insurers' freedom to choose the market sectors they target and their ability to price appropriately for risk.”
But critics say big questions remain about important parts of the proposals.
The Association of British Insurers (ABI) has described the scheme as a disappointing outcome for insurers. The association is pushing the UK government to commit to investing in a further £370 million in flood defences in 2015/16, and to increase this sum every year in line with inflation over the subsequent five years.
Others agree that the key to solving the problem should lay with investment in flood defences. Neil McDermid, managing director of Total Flood Solutions, believes lenders should be incentivised to help homeowners ensure adequate flood defences are in place.
“Most people's biggest investment they make is their home. If there's something wrong with your roof or your walls you get it sorted. If your house is at risk of flooding then I wouldn't personally suggest that they rely on the government or an insurance company to cover them,” he said.
“I would suggest they get a flood risk assessment and get a quality flood solution to protect the property that's fully guaranteed. Building societies and banks should be welcoming people wanting to borrow money to ensure their house is protected because they're protecting their assets.”
The existing scheme expires at the end of July. The new proposals will be given legal backing through the Water Bill and will last for at least the next 20 years. However the insurance industry will continue to honour the terms of the current agreement until the Water Bill has passed through Parliament and Flood Re is formed.
The scheme will limit insurers' potential exposure because it won't cover catastrophic floods above a 1-in-200 year probability. The exclusion of properties built since January 1, 2009, should also discourage building on flood plains, which was a major factor in creating the insurance problem in the first place.
Some very expensive at-risk homes – those that pay the highest rate of council tax – will also not be covered by the new scheme.
Aon Benfield acted as an expert advisor to the UK government on flood risk, and will continue to work in partnership with the ABI on the delivery of the scheme.
