We provide an update on the Flood Re scheme which is expected to go live in April 2016.
The Flood Reinsurance Regulations (Flood Re), setting out a framework to open up affordable cover for the flood element of household property insurance, were approved by the House of Lords earlier this month.
The Flood Re scheme is a joint initiative between the government and the Association of British Insurers (ABI) funded by an industry-backed levy designed to create a pool to support insurers paying out on claims for properties at a high risk of flooding. The effect will be that of lower risk properties cross-subsidising properties at a higher risk of flooding at an estimated cost of £10.50 on annual premiums. The scheme is due to replace a series of voluntary agreements between the Government and members of the ABI which were expected to unwind over time as a result of pricing pressures in a competitive market.
The regulations are expected to go live in April 2016 following approval from financial regulators. Once established, the scheme will be a step forward in providing certainty to property owners by capping flood insurance premiums at a level based on the council tax brand of the properties.
However the British Property Federation has confirmed that the scheme does not go far enough and has warned of millions being exposed to "rocketing" premiums because several types of property will be excluded from the Flood Re scheme.
To discourage development in flood prone areas, houses built after 1 January 2009 will be excluded from the scheme. Flood Re will also not extend to business premises or blocks of flats. The scheme will also catch out private landlords whose buy-to-let properties will be classed as business premises.
Ministers have agreed to monitor the impact of the scheme on excluded properties, however, the British Property Federation has claimed that the "suck-it-and-see attitude to affordable flood cover is not ideal for either householders or people trying to run a small business".
In the meantime, business owners, landlords and investors need to be aware of the exclusions as they could find themselves at the mercy of the open market for building insurance cover. Such groups may continue to face higher premiums or difficulties when attempting to arrange insurance for properties at higher risk of flooding and for business interruption caused by flooding. Lenders and developers also need to be aware that where properties are not covered by Flood Re this could have a severe detrimental effect on the property's value.