The Flood Reinsurance Scheme (Flood Re) is the system preferred by the government and the Association of British Insurers (ABI) to secure affordable insurance against flood risk for homeowners whose properties are considered to be at a high risk of flooding. It is expected to be available from July 2015. The Department for Environment, Food and Rural Affairs (Defra) opened a consultation into Flood Re which concluded on 16 September 2014.

The points raised in the consultation can be grouped under four headings:

1. Proposed governance

The consultation questioned whether the statutory duties set out in the regulations are sufficient, in prescribing how and when the Flood Re CEO should report to Defra, Parliament and the National Audit Office.

2. Funding

  • Flood Re will derive income from a primary and additional levy paid by all insurers, premiums paid to Flood Re by policyholders whose flood cover is ceded to Flood Re by their insurer and payments made from Flood Re’s own reinsurer if claims reach a level where this reinsurance applies
  • Flood Re has to meet it’s own administration expenses, costs of collecting the primary levy and costs of its own reinsurance
  • Flood Re will not receive any income from the government and is restricted from increasing public sector borrowing by more than £100 million in any financial year or having an aggregate borrowing at the end of each financial year of more than £5million

ABI stated that these restrictions could produce significant cash flow concerns in higher claims years and many questioned whether the proposed funding arrangements would be sufficiently robust to secure the necessary approval from the Prudential Regulation Authority.  

3. Properties eligible for cover under Flood Re

The list of excluded properties includes:

  • All commercial property
  • All properties built since the start of 2009
  • Council Tax Band H homes
  • Buy to let residential properties where the landlord arranges the building insurance
  • Purpose built blocks of flats
  • Flats in converted houses, unless the particular conversion and the current occupants of the flats satisfy the narrow test which is to be set out in the scheme document

4. What should go in the scheme document

The consultation identified essential issues to be included:

  • How excesses will be controlled by Flood Re
  • Will there be limits imposed on conditions under Flood Re policies
  • What will happen to payment of claims in exceptional years
  • Should Flood Re rules determine how the primary levy can be recouped from policy holders Defra’s response to the consultation

Defra’s response to the consultations outlined, among other things, that: 

  • The aim is to establish Flood Re by July 2015
  • The government has agreed to adjust the premium thresholds in Wales to take account of their revaluation of tax bands in 2003
  • Concerns from insurers remain over the limited liability of Flood Re and Defra has questioned the fairness and workability of the provisions for funding and financing
  • The ABI and Flood Re must continue to work closely with the insurance industry on operational aspects