Why is Flood Re necessary? Why can’t insurers simply not continue to follow the Flood Insurance Statement of Principles that has been running since 2000?
In the face of the rising flood risk, we have estimated that 350,000 flood risk UK households would struggle to obtain affordably priced flood insurance without a scheme like Flood Re.
The Government and others agreed with us that the Flood Insurance Statement of Principles established in 2000 had become unsustainable and that a new approach was needed to help households at risk of flood obtain affordable flood insurance. The Statement was only ever intended to be a temporary measure and restricted customer choice as insurers only had commitments to their existing customers, and new insurers could decide to whom they offered flood insurance.
How does Flood Re work?
Insurance companies are able to pass on the flood risk element of eligible home insurance policies to Flood Re. Flood Re charges the insurers a premium for each policy, based on the property’s Council Tax band. It is estimated that insurers will pass on the flood risk element of buildings, contents or combined home insurance policies for around 350,000 households.
Flood Re makes no difference to the way customers themselves buy their home insurance. All claims continue to be handled by the insurance companies themselves, and insurers continue to set the premiums they charge to their customers, taking into account the Flood Re premium and other important factors (such as the risks of fire, theft, subsidence and other costs). As a result of the Flood Re scheme, there is now greater choice of home insurance policies for customers at risk of flooding and those policies should be more affordable.
What is being done to prevent flood damage in the first place? Doesn’t this scheme just encourage insurers to keep paying out?
Part of the Flood Re scheme includes providing information to people about how to increase their understanding of their level of flood risk and where they can find information about taking action to reduce their risk, where possible. Flood Re will only operate for 25 years, allowing time for the Government, local authorities, insurers and communities to become better prepared for flooding. This could mean, for example, making use of effective land planning, sustainable drainage, sustainable development and effective flood risk management.
When Flood Re ends, it is anticipated that there will be a system for home insurance prices that will be based more accurately on the kind of flood risks each household actually faces (known as ‘risk reflective pricing’). There is, therefore, an incentive for homeowners, local authorities and the government to take action to try and mitigate the effects of flooding.
Has the cost of home insurance fallen as a result of Flood Re?
Those people who pay higher premiums as a result of their home having flooded can expect their home insurance to become more affordable. This is due to a combination of insurers being able to pass the flood risk to Flood Re, and the policyholder now being able to shop around in a more competitive market that may have been closed to them previously.
Flood Re does not set prices for home insurance, but gives insurers the opportunity of passing to it the flood risk element of a home insurance policy (buildings and contents) at a premium that is capped, depending on the Council Tax band of the property. It is up to an insurer to decide whether they wish to pass the flood risk element of the cover to Flood Re.
Why has my insurer added a cost on to my premium to cover Flood Re even though I don’t live in a high risk area?
Flood Re is partly subsidised by a tax levied on all insurers that offer home insurance in the UK. Flood Re does not regulate if or how insurers choose to pass on this tax to their customers. It is therefore possible that an insurer will choose to spread the costs across even those policies within their portfolio that do not include high flood risk.
Will customers need to have any direct contact with Flood Re?
Customers should continue to buy their home insurance in the same way as before and all the contact will be directly with their chosen insurer. If a customer needs to make a claim, they should contact their insurance company directly. Flood Re works ‘behind the scenes’ with the insurance company, to reimburse them for any payments they make to their customers and so there is no need for homeowners to contact Flood Re directly.
How is the scheme funded?
Flood Re charges insurers a fixed premium for flood risks passed to it, based on a property’s Council Tax band. In addition, Flood Re charges an insurer an excess of only £250 per policy. To cover the shortfall between the estimated cost of flood damage and the new, lower premiums and excesses, insurers pay Flood Re a combined total levy of £180m per year.
Insurers remain responsible for pricing and deciding how best to pass on the benefits of lower premiums and excesses charged by Flood Re to customers. For further information on the funding structure click here
What does the scheme mean for customers? Will insurance premiums be capped?
Insurers are still in control of pricing for overall home insurance. Flood Re charges a fixed premium per policy to insurers, relating to the flood element of the policies transferred to Flood Re. These premiums are lower than would be the case if the flood risks were fully taken into account, as contributions to the costs come from a statutory levy on all home insurers in the UK.
Flood Re also offers insurers an excess per policy of £250. Although Flood Re has no control over the way insurers set the excesses for individual customers, this mechanism should benefit people living in areas at risk of flooding.
What happens if there is a large flood in the early years of the scheme – will there be enough money in the fund to pay claims?
Yes, Flood Re has purchased its own reinsurance and holds reserves and capital so that it can fully cover all claims in at least 99.5% of years.
With Flood Re being reviewed every five years, what guarantee is there that the level of the premium cap and/or the levy will not increase in the future?
Any changes that may be needed at each five year review will reflect the need for the transition to risk reflective premiums over Flood Re’s 25 year existence. Any changes that are considered necessary will be discussed with and approved by the Secretary of State and effected through a change in the current legislation.
Why are small businesses not included?
Small and medium enterprises (SMEs) are not included in Flood Re, because there is already an effective and competitive property insurance market covering them. Neither the ABI, nor the Government, is currently aware of any evidence to suggest that affordable flood insurance will cease to be widely available for them in the future.
Why hasn’t the scope of Flood Re been extended to include properties built after 2009?
The reason for maintaining 2009 as the cut-off point is to ensure continuity with the Statement of Principles which did not apply to properties built after 1st January of that year. Flood Re should incentivise rigorous and responsible planning decisions.
Is my home eligible for Flood Re even though I work from home?
Homes of homeworkers can still be eligible for the scheme if they fulfil all the eligibility criteria which can be found here. Such properties have to be primarily used as private, residential homes and have a Council Tax band.
My home was previously used for residential purposes and then used as an office. I am now returning it to be a domestic property and live in it. Will I qualify for Flood Re?
Flood Re will cover policies on those properties where it can be proven that the property had been built and used as a private, residential property (i.e not a business or an office) prior to 1st January 2009.
I rent a property in a flood risk area. Can I get still get contents insurance?
Flood Re accepts the ceding of policies covering tenants’ possessions and contents of rented properties subject to the usual eligibility criteria, which can be found here.
I have to live away from home for part of the year and I rent out the property during that time. Am I still eligible for Flood Re?
Flood Re can only accept policies where the holder of the policy or his/her immediate family lives in the property for some or all of the time during the life of the policy or the property is unoccupied. If you or someone from your immediate family lives in the property for at least some of the time during the policy term, you can rent out your property for the rest of that time as long as it still fulfils the eligibility criteria which can be found here and is being used for private, residential purposes.