The Department for Environment, Food and Rural Affairs (DEFRA) and the Association of British Insurers (ABI) have finally reached agreement on the ‘Flood Re’ scheme, which is designed to ensure even the highest-risk homes can protect themselves against the financial fallout of flooding.
Home insurance is a huge worry for thousands of homeowners living in the country’s flood zones.
- Many fear that if they make a claim, their premiums will shoot up to unaffordable levels – or they won’t be able to get cover at all.
- Because of this, insurers have already committed to offer insurance to homeowners who’ve been previously flooded, or who are at risk, under an agreement called the ‘Statement of Principles’.
- This scheme has been running since 2000, but was only ever intended to be a short-term solution and will finish next summer.
- Flood Re will replace the Statement of Principles. It will provide a pool of money that will fund claims made by flood-risk homes which would otherwise find it difficult (or even impossible) to afford insurance.
How does Flood Re work?
Flood Re is a reinsurance scheme (which insures insurers) and is owned, managed and funded by the insurance industry itself.
Flood Re will allow insurers to ‘pass on’ the flood risk element of their home insurance policies to the scheme. This makes insurers a lot less nervous, which in turn means they won’t penalise high-risk flooding homes when it comes to getting cover.
The flood element within home insurance premiums will be based on the property's council tax band. They will start at £210 for homes in lower council tax bands, capped at a maximum £540 a year for homes in the highest bands.
Flood Re will do more for homeowners in high-risk flood areas than just providing affordable cover. It will also mean they can shop around for the cheapest deals.
Janet Connor, managing director at AA Insurance said: “As things stand, while an existing insurer will continue to offer cover the homeowner with a history of flood claims, it will still be difficult for homeowners to find another insurer to take the risk on. However Flood Re will ensure that homeowners can look for a competitive quote just like anyone else.
“Although premiums are likely to be higher for homes in areas prone to flooding than those that are not; they will be more affordable than they are now and homeowners will be
able to look for competitive quotes.”
What will it cost?
Insurers are investing £17m in the Flood Re scheme, which according to the Association of British Insurers (ABI) should benefit between 300,000 and 500,000 homes.
All home insurance customers will have to pay a levy into the fund too, totalling about £10.50 a year. But the ABI says this is already reflected in the extra premiums homeowners are paying to cross-subsidise the flood risk.
Who does the scheme cover?
Initially the scheme was only going to cover properties in council tax bands A to G. But DEFRA has now announced that the qualifying criteria have been widened.
This means that homes which fall into the highest band for council tax, Band H (Band I in Wales) are among those which will now be included in the scope of Flood Re.
Who’s not covered?
Although the vast majority of homes at risk of flooding will be covered by the Flood Re scheme, some are excluded.
- Properties built since 2009 won’t be protected by the scheme, as a way of discouraging developers from building on flood plains.
- Most flat owners, small businesses and private landlords will also be excluded, which has prompted criticism from the British Property Federation.
Its director of policy Ian Fletcher, said: “The government and insurance industry continues to pick and choose who can participate in Flood Re, seemingly at whim. This latest announcement will look odd to the millions of flat owners, that they are not protected against escalating premiums, while the most expensive homes in the country are.”
So what happens now?
Now that the government has reached agreement with the insurance industry, legislation can be laid in Parliament in 2015 to enable Flood Re to work as a reinsurer.
The firm will require full regulatory approval both from the Prudential Regulatory Authority and Financial Conduct Authority.
Flood Re expects to announce the successful bidders for both the managing agent and reinsurance broker in January.
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