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Flood Re
FoundedApril 1, 2016; 8 years ago (2016-04-01)
HeadquartersLondon
Area served
United Kingdom
Key people
Brendan McCafferty (CEO), Mark Hoban (First Chairman of the Board of Directors)
ProductsReinsurance
Websitefloodre.co.uk

Flood Re is a proposed [levy and pool system]-http://nationalfloodforum.org.uk/?p=976 in the United Kingdom, set to replace the Statement of Principals agreed between the Government and Insurance companies to provide flood insurance coverage to domestic properties and small businesses deemed at significant risk of flooding (this is generally defined as no worse than a 1.3% or 1 in 75 annual probability of flooding).[1] Estimated to cover the most at risk 2% 250,000 homes, though [independent?] Centre for Climate Change and Economics Policy suggest 370,000 homes could be eligible (when?) covered.[2]

Historical flood record of the River Severn at Worcester Cathedral

http://www.theguardian.com/news/2013/dec/01/weatherwatch-cure-flooding-blight


Development

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Homes at significant flood risk are defined as those with a greater than one in 75 chance of flooding in any given year.[3]

The Statement of Principals reached in 2000, obliges insurers to provide cover for high-risk properties while the government continues to improve flood defences. This arrangement was due to finish at the end of June, but had been extended for a month.[3]the Statement of Principles will continue to be honoured until Flood Re is set up, which the two sides hope will happen within two years.[4] The proposals will be given legal backing through the Water Bill, and are expected to last for at least the next 20 years.[5]


[6]


ABI members will voluntarily continue to meet their commitments to their existing customers under the old Statement of Principles agreement. This means they will continue to offer cover to existing customers where flood risk is not ‘significant’ according to the Environment Agency, or where the Government has announced plans to reduce flood risk below ’significant’ within five years. The premium and excess will reflect the insurer’s understanding of the flood risk.[7]

Defra ask the European Commission for approval to make state aid available on the grounds the scheme is necessary for community safety.[8]

History (Statement of Principles)

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A series of agreements on flood insurance have been made between Governments in the UK and the insurance industry since the 1960s. These started with what is referred to as the “Gentleman‟s Agreement” more recently named the "Statement of Principles on the provision of flood insurance".[9]

Following the serious UK flooding in 2000, which affected 10,000 properties in 700 locations and caused £1 billion of damage, the government and the Association of British Insurers drew up a statement of principles.[10]

Under this agreement ABI members pledged to continue insuring properties at high risk of flooding if the government continued to invest in flood defences.In recent years government spending on flood defences has been cut as the coalition strives to balance the country’s budget. This has intensified the ABI’s dislike for the statement of principles which it says has created a two-tier insurance market in which new entrants do not have to insure properties in high risk flood areas. This means they can offer cheaper premiums than insurers who did sign up to the agreement and who pay for the cost of providing flood cover in all areas by making all customers pay a bit more for their home insurance. ‘Those insurers who abide by the statement of principles subsidise the cost of high-risk policies across all policyholders,[10]

In 2008 the previous UK Government and the ABI agreed to revise and extend the Statement of Principles for one last five year period. In addition, the Statement of Principles agreements have not applied to all insurance companies. Insurance companies who are not members of the ABI or have entered the household insurance market subsequent to the agreements being signed in 2008 are not obliged to offer cover at all. The ABI have stated publically that, “The SoP was only ever meant to be a temporary ‟sticking plaster‟” and that “New entrants to the home insurance market start from a position where they have no commitments under the agreement. This gives them a significant commercial advantage.”[9]

The Government and others agreed with us that the agreement has become unsustainable and that a new approach was needed to safeguard affordable and widely available flood insurance in the UK. The Statement of Principles was only ever intended to be a temporary measure, and has restricted customer choice as insurers only have commitments to their existing customers, and new insurers can decide to whom they offer flood insurance. The Statement also does not guarantee affordable flood premiums or manageable excesses, and despite it an increasing number of people are beginning to struggle to afford flood insurance.[7]

in January 2013 the Association of British Insurers (ABI) said it would not renew the statement of principles for flood insurance as it was supposed to be a short-term measure and grossly distorted the market.-http://www.insuranceage.co.uk/insurance-age/news/2142531/abi-refuses-renew-statement-principles-flood-insurance. According to the ABI, the current Flood Insurance Statement of Principles, agreed in 2000, would be honoured until it lapsed in June 2013. However the trade body added that the agreement would not be renewed because it grossly distorted the market. The association claimed that people in lower risk flood areas paid more to subsidise those at higher risk, that customers in high risk areas were tied to their existing insurer, and that those insurers covered by it have ended up with a disproportionate number of high flood risk properties. The ABI also issued a list of areas, headed by Boston and Skegness in Lincolnshire, where homes were most at risk from flooding according to its analysis of data from the Environment Agency.-http://www.insuranceage.co.uk/insurance-age/news/2142531/abi-refuses-renew-statement-principles-flood-insurance

Negotiations on replacement

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With the Statement of principles due to expire in june 2013...

In early 2012, a Commons Public Accounts Committee report critical of Defra and the Environment Agency was released, citing a lack of responsibility and slowness in negotiating a revised Statement of Principles with the insurance industry to provide coverage for those homes most at risk of flooding. Among the committee's recommendations The government needs to reach an agreement with the insurance industry urgently and work more closely with the industry to ensure insurance cover is both available and affordable.[11]

The floods came at a time when the Government and the UK insurance industry are re-negotiating a deal to provide affordable insurance to flood prone homes, known as the Statement of Principles, with the current subsidy due to expire in June 2013.[12] The favoured solution for the insurance industry is a levy on low risk homes with the government and taxpayer acting as an insurer of last resort.[12] The Association of British Insurers stated that "The Government has indicated it will not provide any temporary overdraft facility for the insurance industry’s not-for-profit scheme, which makes it very difficult for it to go ahead. As a result, negotiations have hit an impasse."[13] Should the issue not be resolved this would leave an estimated 200,000 homes unable to get insurance from June 2013.[14] An alternative being discussed in the insurance industry is the possibility that flood pools may offer a hybrid solution acceptable to both parties.[14] Because of the flooding in 2012, insurance renewal premiums were expected to rise between 10 and 50 percent, depending on the scale of damages suffered. Even those not directly hit by the flooding were likely to see their premiums rise by 5 percent next year.[15][16] Currently insurers provide flood coverage on the understanding that government invests a certain amount of funds on flood defences, however the spending on flood defences has slipped below the levels seen in 2008.[17][18]

Analysis of Flood Re

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Flooding Bath Road, Cheltenham UK 2007

Flood Re will be designed to fully cover at least 99.5% of years. Even in the worst half a per cent of years, Flood Re will cover losses up to those expected in a 1 in 200 year – a year six times worse than 2007 – with Government taking primary responsibility-working with the industry and Flood Re-for distributing any available resources to customers should claims exceed that level. Q. Why, when the scheme is operational, will it not cover a large-scale flood loss above a 1 in 200 year probability? Who will help me if I am flooded in these circumstances? A. A flood of this severity is very unlikely-it would need to be six times worse than the flooding in 2007, which was described as the biggest peacetime civil emergency since World War 2. The Government recognise that the Flood Re scheme is not designed to cover ‘catastrophic’ flood events, and in such unlikely circumstances the Government would have primary responsibility for an effective response.Flood Re is designed to provide support to those who need it most and will cover homes. Homes in the highest Council Tax band H in England, and equivalent properties in Scotland, Wales and Northern Ireland will not be covered by the scheme. Homes built after 1 January 2009 will not be covered (as applied under the old Flood Insurance Statement of Principles) - this is to avoid incentivising unwise building in flood risk areas. The individual nature and assessment of business risks means that available and affordable flood insurance is less of an issue than for homes. Flood Re would establish clear rules for ‘borderline’ cases such as ‘Bed and Breakfast’ properties.[7]

Homes in band H (I in Wales) will now be covered.http://www.telegraph.co.uk/finance/personalfinance/insurance/11301860/Flood-insurance-scheme-is-expanded-to-include-riverside-mansions.html

British Insurance Brokers Association-http://www.insuranceage.co.uk/insurance-age/news-analysis/2292058/flood-re-smes-left-at-risk-say-brokers raised concerns about:[19]

  • “genuinely uninsurable” properties, which are to be excluded from the agreement.[19]
  • certain SMEs, including mixed-use properties such as bed and breakfasts, will not be included in Flood Re, although they had previously been covered by the SoP.[19] Insurers will be under no obligation to provide flood cover to small businesses. This is a departure from the Statement of Principles. Flood Re is to establish clear rules for borderline cases such as B&Bs, but it is not currently clear what these might be.[20]
  • properties falling in Council Tax band H will not be covered under the scheme. In England this is any house worth £320,000 and above; in Wales, £240,001 and above; and in Scotland any house worth £212,001 and above. Brokers will need to be live to the fact that come 2015 clients falling into these categories: 1) may not be able to secure flood cover at all; or 2) may face substantial increases in their premiums.[20]
  • This is because the apartments in the building are owned leasehold. Crucially, the freeholder, a management company, pays the buildings insurance and passes the cost to residents such as the Morrises. As the freeholder is a business, the vital Flood Re protection is void. The same goes for farms and bed & breakfast accommodation. An industry source said this was a “political” decision to prevent home owners subsidising businesses.[21]

called for one single fund across the market, adding that the government could provide start-up financing in the form of a loan, to prevent catastrophic failure during early years of fund.[19]

LSE analysis and climate change

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"Flood re 'significantly underestimates' climate change impact, warns LSE"-http://www.compliancy-services.co.uk/news/article/3197/flood-re-significantly-underestimates-climate-change-impact-warns-lse raised questions about the long term sustainability of Flood Re as underestimated number of homes at risk of moderate to high flooding in the future.-http://www.cccep.ac.uk/Publications/Policy/docs/Securing-insurance-in-areas-of-flood-risk.pdf Climate change push more homes into uninsurable territory which would then be eligible for the scheme and could make the fund financially unviable.-http://theconversation.com/government-flood-insurance-plan-is-already-treading-water-18175

http://www.cccep.ac.uk/newsAndMedia/Releases/2013/MR190813-home-insurance-in-areas-of-flood-risk.aspx http://www.carbonbrief.org/blog/2013/08/uk-flood-fund-underestimates-the-number-of-homes-at-risk/

"formalise the existing cross subsidy" official impact of scheme by Defra 58% chance the scheme will fall into deficit in the next 20 years. Independent analysts warned that the danger of Flood Re running out of money will be even greater in the first few years, before it has built up enough reserves to withstand a severe flood. The Government asked Prof Stephen Diacon, a specialist in insurance and risk management at Nottingham University Business School, to audit the plans. He said the new scheme, which has yet to be finalised, would work if it was “lucky”. [22]

European Law

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New flood insurance tax 'could breach EU law'-http://www.telegraph.co.uk/topics/weather/10265678/New-flood-insurance-tax-could-breach-EU-law.html http://www.out-law.com/en/articles/2013/august/defra-impact-assessment-shows-flood-re-could-breach-eu-law-newspaper-claims/

The Government acknowledges that Flood Re does not achieve "the level of value for money normally required of Government policies" since the costs of Flood Re, including the necessary reinsurance contract, are expected to be greater than its economic benefits.[23]

The British Property Federation has called for SMEs to be included in the Flood Re directive.-http://www.postonline.co.uk/post/news/2287841/property-federation-calls-for-flood-re-to-cover-smes


Lloyds response

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US National Flood Insurance Program which has accumulated debts of $17.75bn, as it does not purchase reinsurance, following catastrophic losses in 2005, 2008 and 2011.[24]

see criticisms of US National Flood Insurance Program


http://www.theguardian.com/business/2014/feb/10/flooding-costs-one-billion-pounds-insurance-expert-warns-rising-premiums

Small Business

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Government under pressure to make Flood Re available to businesses, the Federation of Small Businesses, British Chamber of Commerce [25] argued that the scheme should cover small businesses such as shops, restaurants, public houses and (B+Bs. though the ABI said that it saw no evidence of commecial landlords being unable to find insurance.[25]


http://theconversation.com/after-the-flood-finding-ways-to-insure-the-uninsurable-without-breaking-the-bank-23110

Alternatives

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Noah/Flood Mu

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Proposed solution from Marsh Insurance at the second Environment, Food and Rural Affairs Select Committee evidence session on 20th March 2013. http://www.publications.parliament.uk/pa/cm201314/cmselect/cmenvfru/writev/flood/m07b.htm


Noah would not incentivise the government to spend more on flood defences.-http://www.groundsure.com/blogs/flood-insurance-–-no-further-forward-deluge-model-arguments-and-alternatives

An alternative approach, Project Noah, was proposed in April 2012 by the insurance companies Marsh and Guy Carpenter.[138] This aims to provide a pooled risk approach and is predicated on balancing out risk across the country since it was considered unlikely that floods would impact on all areas of the UK at once. Risk would be ceded in some proportion to the reinsurance industry. The model would use detailed flood risk maps to assess premiums and risk. The company described a key advantage of Noah as the fact that the model would require "no taxation, no subsidy, no levies, no legislation, and no additional infrastructure". Further, under Noah, there would be no contingent liability on the Government for flood losses, the relative merits of proposed flood defences could be considered, and householders could reduce premiums by improving their property's resilience to flood.[139] The ABI has criticised the Noah model, stating that it would not ensure affordable cover for customers, would require extensive government support, and was reliant on the international reinsurance market being able to accommodate it. It further added that control over price would sit with one organisation in charge of the Noah pool and that this would lead to the loss of the free market advantages which would, however, continue to apply under Flood Re.[140] Noah was therefore not supported by the ABI's members.[23]

Marsh Ltd presented a variation on Noah, 'Flood Mu', during its evidence session with us in March. This proposed a risk-pooling solution, with a pre-set amount of flood claims in a given period being redistributed across all insurers in proportion to the size of their business in household cover. Some risk would stay with the original insurer, the proportion of which had yet to be determined.[142] Insurance companies could obtain reinsurance for their retained risk via the Noah model. The ABI also criticised this variant of Marsh's model, considering that it would not safeguard affordability of premiums or the availability of cover, nor would it incentivise the Government to invest in flood defences.[23]

Flood Re Mutual

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Open Market

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an immediate move to a free market would cause "significant hardship for many households", the Government wished to see a "transition to a free market for flood insurance so that flood risk is accurately reflected in prices and the right incentives are in place to manage the risk of flooding".[23]

November 2013

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Following the release of a commentary on Flood Re amendments released by DEFRA in November 2013 the Association of British Insurers (ABI) released a list of concerns it wanted discuss at the Water Bill committee meeting in December 2013, describing some recent amendments to the Flood Re scheme as "completely inappropriate", with concerns focussing on Flood Re funding levels. The government proposed plans to take a surplus of the Flood Re insurance pool (paid for by a levy on home insurance policies) if it reaches a certain level, or if the scheme ends.should a devastating flood exhaust the fund in the early years, mechanism to ensure that the insurance industry could make up shortfall over a period. with ABI...[check paraphrasing][26]

  • 22 Nov 2013-Government confirms SME will not be covered by Flood Re [Insurancetimes paywall]
  • 22 Nov 2013-Biba wil push for SME to be included in Flood Re [Insurance times paywall]

in a debate in the House of Commons 25 November 2013 MP's called for clarification of the proposed Flood Re scheme...http://www.insurancetimes.co.uk/mps-call-for-greater-clarity-on-flood-re/1405905.article


[edit]

References

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  1. ^ "Revised Statement of Principles on the Provision of Flood Insurance" (PDF). gov.uk. July 2008. Retrieved 25 August 2013.
  2. ^ Hjalmarsson, Johanna (4 December 2013). "Government flood insurance plan is already treading water". The Conversation. Retrieved 11 February 2014.
  3. ^ a b Cite error: The named reference BBC1 was invoked but never defined (see the help page).
  4. ^ Grey, Alistair (27 June 2013). "Ministers agree UK flood insurance deal". Financial Times. Retrieved 27 June 2013.
  5. ^ MacDonald, Mairi (27 June 2013). "Flood Re wins out as government and insurers reach long-term agreement". Postonline. Retrieved 27 June 2013.
  6. ^ "Flood insurance agreement reached". Gov.uk. 27 June 2013. Retrieved 27 June 2013.
  7. ^ a b c Cite error: The named reference ABI was invoked but never defined (see the help page).
  8. ^ "Government to seek EU permission for Flood Re". Insurance Times. 10 July 2012. Retrieved 12 July 2013.
  9. ^ a b consultation document. "Securing the future availability and affordability of home insurance in areas of flood risk". defra gov.uk. Retrieved 27 June 2013.
  10. ^ a b McGagh, Michelle (29 November 2012). "Stalemate over flood insurance is bad news for homeowners". Citywire Money: The Lolly. Retrieved 4 September 2013.
  11. ^ Wheal, Chris (31 January 2012). "Government drops flood subsidy hint as Defra weathers harsh criticism". Postonline.co.uk. Retrieved 7 March 2013.
  12. ^ a b "UK insurers face $1.6 bln flood bill: PwC". Reuters. 23 November 2012. Retrieved 24 November 2012.
  13. ^ "As UK Floods Continue, ABI Urges Progress on Stalled Insurance Talks". Insurance Journal. 26 November 2012. Retrieved 1 December 2012.
  14. ^ a b "November, 2012 UK Flooding". Air Worldwide. 27 November 2012. Retrieved 1 December 2012.
  15. ^ Sparks, Matthew (7 December 2012). "November floods push insurance losses past £1bn". The Telegraph. Retrieved 7 December 2012.
  16. ^ "November 2012 Global Catastrophe Recap" (PDF). Aon Benfield. Retrieved 7 December 2012.
  17. ^ "Summer Floods in the UK: Comparing 2012 and 2007". Air Worldwide. 26 November 2012. Retrieved 1 December 2012.
  18. ^ Gray, Louise (1 December 2012). "Did cuts in dredging rivers cause floods?". Telegraph. Retrieved 1 December 2012.
  19. ^ a b c d Morrison, Caitlin (3 September). "Flood Re: SMEs left at risk, say brokers". Insurance Age. Retrieved 4 September 2013. {{cite news}}: Check date values in: |date= (help)
  20. ^ a b Collins, Susan. "Flood Re – out of the hot water". Mills & Reeve. Retrieved 4 September 2013.
  21. ^ Hyde, Dan (8 February 2014). "Flood victims abandoned by the insurance lifeboat". The Telegraph. Retrieved 8 February 2014.
  22. ^ Ross, Tim (23 August). "Everyone to pay more to insure flood risk homes". The Telegraph. Retrieved 24 August 2013. {{cite news}}: Check date values in: |date= (help)
  23. ^ a b c d Household flood insurance, House of Commons Food and Rural Affairs Committee, 4 July 2013, retrieved 25 August 2013
  24. ^ "1Lloyd's response to DEFRA consultation: "Securing the future availability and affordability of home insurance in areas of flood risk"" (PDF). Lloyds. Retrieved 8 February 2014.
  25. ^ a b Pickard, Jim (13 February 2014). "UK looks at asking Brussels for flood aid". Financial Times. Retrieved 15 February 2014.
  26. ^ McGuire, Helen (29 November 2013). "Association to raise concerns in Water Bill committee meeting". Insurance Times. Retrieved 3 December 2013.

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