Flood Insurance – An Update
Earlier this year we reported on the Statement of Principles, an agreement reached between the Government and the ABI in 2008 that ensured that homeowners and small business had access to affordable flood cover. It was due to expire in June 2013 and at that stage there was no indication as to what would happen next.
June has come and gone, so what happens next?
On 27 June 2013 the Government announced an agreement with the ABI: a “Memorandum of Understanding”. This is the first step towards developing a not for profit scheme, Flood Re. It is hoped that the scheme will come into effect in the summer of 2015 and secure continued access to affordable flood insurance cover to certain households in high risk areas.
Flood Re is to be run and financed by insurers. The scheme involves setting up a fund to which all insurers will contribute. The amount thought to be required is £180 million per annum. The costs of the fund will be passed down to policyholders, with an estimated £10.50 levy on every household premium with the aim to distribute the costs of the fund evenly amongst all policyholders. Those high risk households that insurers cannot insure themselves will be covered by the fund.
In order to ensure that there is continuity in the market, the flood risk element of insurance premiums will be capped in accordance with Council Tax bands. Those in Bands A and B will pay a maximum of £210 with those in band G paying up to a maximum of £510.
There are a couple of fundamental changes in the way the insurers will be considering flood risks:
Small Businesses
Insurers will be under no obligation to provide flood cover to small businesses. This is a departure from the Statement of Principles. Flood Re is to establish clear rules for borderline cases such as B&Bs, but it is not currently clear what these might be.
Residential properties in council tax band H
Those householders with properties falling in Council Tax band H will not be covered under the scheme. In England this is any house worth £320,000 and above; in Wales, £240,001 and above; and in Scotland any house worth £212,001 and above.
We are keeping a watching brief on the situaton regarding the above 2 catagories. At the moment there is a likelyhood that come 2015 clients falling into these categories: 1) may not be able to secure flood cover at all; or 2) may face substantial increases in their premiums.
In the meantime…
ABI members will voluntarily continue to meet their commitments to their existing customers under the old Statement of Principles agreement. The current disparity in premiums between those with at risk properties and those without will continue for the moment. Insurers will continue to base premiums on the basis of their own understanding of the risk.
We will be having discussions with clients about what action they can take to mitigate their risk and reduce any future premium payments. These discussions may involve encouraging clients to apply to the Environment Agency for an insurance-related request letter, which provides information on the standard protection provided by any flood defences and those planned; to obtain an independent flood risk assessment; or to fill out a flood mitigation survey to help them coherently present their risk profile to insurers.
Conclusion
The future looks hopeful for those high risk households being able to secure ongoing flood cover. However, it is a different picture for small businesses. Action may need to be taken now on mitigating flood risk. There may emerge some specialist insurers who are willing to take on the risk. One of the main aspects that will be considered is the cost of cover.
