On 27 June 2013, it was announced that the Association of British Insurers (ABI) and the government agreed to a Memorandum of Understanding to help ensure that flood insurance continues to be affordable and widely available to hundreds of thousands of households in flood-prone areas. Environment Secretary Owen Paterson stated, “we have worked extremely hard with the industry [ABI] to reach an agreement on the future of flood insurance. There
are still areas to work through, but this announcement means that people no longer need to live in fear of being uninsurable and that those at most risk can get protection, now and in the future’. This goes for new build insurance too.
This memorandum is an agreement to replace the expiring Statement of Principles with a not-for-profit flood fund to be known as ‘Flood Re’. The Statement of Principles was always intended to be a temporary measure until a more permanent solution could be developed. While there are still many details that have yet to be worked through the framework for Flood Re has been established and implementation of the new scheme is tentatively set for the summer of 2015. The following provides some of the key elements of the agreed-upon Flood Re scheme.
WHAT IS FLOOD RE?
Flood Re will be a not-for-profit fund run and financed by insurers in order to cover homes at high risk for flooding. Insurers will place these high-risk homes, ones that they feel unable to insure themselves, into the fund.
Premiums will be capped based on Council Tax bands, thus creating a limit on how much flood insurance will cost for the homeowner. The capped premiums will start at £210 per annum for homes in Council Tax bands A and B, rising to £540 per annum for homes in Council Tax band G. These premiums, along with a levy on all household insurers of £180 million a year (averaged out as £10.50 per household policy), will go into the fund to help pay out any claims.
However, Flood Re will also have certain exclusions. Homes in England’s highest Council Tax band, H, will not be included in the scheme, nor will equivalent properties in Wales, Scotland and Northern Ireland. Homes built after 1 January 2009 will also be excluded in order to avoid unwise building in high risk flood areas. Additionally, Flood Re appears to exclude to small businesses, differing from the current Statement of Principles. Therefore, once Flood Re is implemented, small businesses will likely have to obtain flood cover on the open market like medium and large businesses.
WHAT HAPPENS NOW?
Until Flood Re becomes finalised and implemented, the ABI has stated that their members will voluntarily continue to meet their commitments to existing customers under the Statement of Principles. Flood cover will continue to be offered to:
Domestic properties and small businesses where flood risks are not ‘significant’, generally defined as properties with no greater than a 1.3 per cent or 1 in 75 annual probability of flooding, and Domestic properties and small businesses where the government has announced plans and notified the ABI of its intention to reduce the flood risk to below ‘significant’ within five years including New build insurance properties.
Premiums will continue to reflect the level of risk presented by the specific property, and properties built after 1 January 2009 are still excluded. This means that there will be no immediate change to current structure of flood insurance during this transitional period.
ProAktive will keep you updated on any new developments as more information and details are released, and help ensure a smooth transition once Flood Re is implemented.