The UK is at an increasing risk of flooding, said to be the greatest impact of climate change on the UK. The Department for Environment, Food and Rural Affairs (DEFRA) estimates that 5.8 million properties (about 20% of all homes) are at some risk. Following high levels of flooding nationwide over recent years there has been a concern that vulnerable households no longer have access to affordable flood cover. Whilst insurers are currently offering homes flood insurance in accordance with a Memorandum of Understanding, premiums are not currently capped and therefore reflect the risk of flooding. In response to this the previous coalition government, in conjunction with the Association of British Insurers, in June 2013 proposed the introduction of a not-for-profit reinsurance body run and managed by the insurance industry. This scheme is called Flood Re.
Flood Re is intended to cover those properties most at risk and the government estimates that around 1-2% of domestic households might benefit from being reinsured through Flood Re. Premiums will be capped, with the cap calculated by reference to the property's council tax band. Premiums will start from £210 for a property in council tax band A, and will rise to £540 in band H. The customer will purchase their home insurance as usual, and the premium will include a levy contribution. The insurer will calculate the flood risk premium and cede policies above the premium threshold to Flood Re. Any claims will also be made through the insurer as usual, and the insurer will be reimbursed by Flood Re on ceded policies. Flood Re will take the levy contributions, premiums of ceded policies and ad hoc contributions from insurers as needed, and will purchase reinsurance.
However, the scheme has come under criticism for a number of reasons, in particular the cost of the scheme. The levy will be set at a level that is said to replicate the cross subsidy that already exists in the market as domestic policyholders currently subsidise 'at-risk' policyholders. All householders will pay £10.50 to subsidise the cost of insuring homes at risk of flooding. The Committee on Climate Change (CCC) has estimated that the scheme will cost three times more than the benefits it will bring. Professor Lord John Krebs at the CCC has warned the Chief Executive of Flood Re, Brendan McCafferty that Flood Re is set to subsidise many hundreds of thousands of households more than the estimated number that might struggle to afford cover in the free market. Flood Re will subsidise flood insurance for more than 500,000 homes, but only 200,000 would find it hard to get affordable insurance.
A further criticism of the scheme is its failure to include certain leasehold flats, where insurance is purchased by a freeholder and that insurance is categorised as commercial rather than domestic as it is purchased on a whole block basis. Private rented landlords and businesses are also excluded. The British Property Federation says that there are 800,000 properties across the UK that are ineligible for the scheme, of which they consider 70,000 to be a high risk. Other exclusions to the scheme include homes built since 2009, surface water flooding and catastrophic flooding (the scheme is limited to a 1 in 200 year event). Council tax banded H properties were set to be excluded but this has now been revised following concerns that the owners of those properties would face huge premiums. This has proved a controversial decision given the number of flat owners, small businesses and private rented landlords who remain excluded from the scheme.
The London School of Economics has pointed out that the scheme makes no allowance for climate change and says that the scheme is a reactive measure to flood damage rather than helping to address the cause of the flooding. However, the government did introduce a £5,000 grant in April 2014 for people whose homes and businesses were flooded in early 2014, to help towards fixing damage and installing flood-prevention measures. Others say that, unless the government invests more in flood defences, we will see large insurance premium increases and that Flood Re is counter-productive to the long-term management of flood risk in the UK. But Flood Re is not intended to be a long-term solution. It is a transitional arrangement set to last 25 years with an eventual move towards more risk-reflective prices.
So what of the fate of Flood Re following the recent change in government? A series of seminars and technical workshops have recently taken place, attended by delegates from the insurance industry. These delegates were informed that the scheme will go live in April 2016. McCafferty has played down what some have said is a delay in Flood Re going live, saying that Flood Re will exist as an organisation, the Prudential Regulation Authority (PRU) application that is required will have been made, and the systems and infrastructure Flood Re needs will have been built by the end of August. Before the scheme actually goes live the scheme also needs to be tested. McCafferty states that the insurance industry is reassured by this realistic timeframe.