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?
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.
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?
The Flood Re scheme was not designed to cover small and medium enterprises (SMEs). The focus of the Scheme has always been purely residential, enabling homeowners to protect their own homes. Flood Re is aware of a new commercial insurance scheme launched by the British Insurance Brokers’ Association (“BIBA”) which may be able to assist SMEs which are not eligible for the Flood Re Scheme. Details can be obtained from BIBA.
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.
Will Flood Re reinsure leasehold properties?
Yes. Leasehold properties are eligible for the Scheme if they:
(1) fulfill the definition of a “Dwelling”;
(2) the leaseholder has an obligation in their lease to insure the structure of the Dwelling; and
(3) all other eligibility requirements are met.
Under English law, it is unusual for short-term leaseholders to have this obligation as it usually remains with the freeholder. It is more typical of longer term leases (e.g. 999 year leaseholders) where the rights and obligations are akin to a freehold interest. Insurers should ensure that they have in place appropriate controls to check that leasehold properties being ceded to the Scheme meet this requirement.
Are flats eligible for the Scheme?
Yes. It is possible for an individual flat to meet the definition of a “Dwelling” (being part of a building and a single residential unit).
Where a flat is owned on a leasehold basis and the leaseholder has the obligation to insure the structure of the flat itself (see number 1 above), and the insurance policy meets all other eligibility criteria, it is possible to cede it to the Scheme. Again, under English law, it is very unusual for leasehold flat owners to have the necessary rights or obligations to insure the structure of their individual flat so insurers should specifically check this before ceding flats to the Scheme.
For the avoidance of doubt, a block of flats together would not meet the definition of a “Dwelling”.
Will Flood Re reinsure properties that were built in 2008 but didn’t receive a Council Tax Band until 2009?
Only properties that were built, as evidenced by the Council Tax Register, prior to January 2009 are eligible for the Scheme. However, Flood Re is aware of certain instances where a build had been completed in 2008 and the dwelling was used as residential premises, but a Council Tax Band was not issued until 2009 due to a delay in administrative proceedings. In such cases, Flood Re will accept these premises provided that the owner can show to Flood Re’s satisfaction that they lived in the premises, using them as their home, prior to January 2009. This can be evidenced, for example, through furnishing a utility bill.
Note that this exception does not apply to properties that were built and used as commercial premises and only converted to residential dwellings after January 2009.
Will Flood Re accept properties where the build was started pre-January 2009 but was not completed until after that date?
No. Flood Re will only reinsure properties where the build was completed prior to January 2009.
Would the structure and contents of an extension which is in the process of being built (but not yet completed) be covered by the Scheme in case of damage caused by flooding?
Yes. The structure of such an extension would be covered as it would form part of the already existing “Dwelling”. The contents of such an extension would only be covered if they fulfill the definition of “Contents” in the home insurance policy. For the avoidance of doubt, we would not expect professional trade tools and materials to meet the definition of “Contents”.
If Household Premises made up of two or three flats are insured in the name of a management company, could this still be eligible for the Scheme?
The Scheme Document states that the insurance policy has to be either in the name of an individual or individuals, or held on trust for that individual or individuals. Therefore, it is possible for a management company to obtain insurance on trust for the owners of the two or three separate flats within the Household Premises, so long as this is structured as a true legal trust.
For how long or how often does a policy holder or their immediate family need to live in a property for it to be eligible for the Scheme?
The eligibility criteria include the requirement for the policyholder or an immediate family member to live in the property for “some or all of the time” during the policy period. A number of participants have asked that Flood Re better specifies what amounts to “some of the time”. Rather than specifying a numerical value for “some of the time”, we would draw your attention to the fact that the requirement for a homeowner to live in the insured property for “some or all of the time” is just one of the eligibility criteria. As a fundamental starting point, the policy being ceded to Flood Re must still meet the basic definition of a “Home Insurance Policy” as defined in the Scheme documents and should not be on different terms to an insurer’s standard home insurance policy.
By way of example only, Flood Re would not expect to be ceded a home insurance policy relating to a property which had a tenancy agreement in place for all or part of the policy period because a policy designed to meet the needs of a landlord’s risks would not normally feature in a standard home insurance policy. Furthermore, we would not normally expect any given insured to have more than one home insurance policy in place.
Insureds may occasionally rent out their entire home or part of it for short periods, such as a few days or weeks in accordance with the terms of their Home Insurance Policy and those properties can be ceded subject to meeting all other requirements.
Flood Re requires insurers to meet all of the eligibility requirements, in good faith. The Scheme is designed to assist homeowners most at risk of flooding, not businesses or properties being rented out for commercial gain. Flood Re’s own reinsurance is based on the same eligibility criteria so it is important that only eligible risks are ceded to us.
Can a second building (shed, outbuilding…etc) at the same risk address as the main home be included under the same home insurance policy?
Yes. Outbuildings “enjoyed with” the primary residence can be ceded under a single home insurance policy provided that they do not have a separate Council Tax Band and do not attract business rates. There is no upper limit to the number of additional buildings on that basis. Outbuildings do not need to meet the pre-2009 build date requirement.
Can mixed-use premises be ceded into the Scheme?
Yes. Dwellings which form part of a single mixed-use property can be eligible for Buildings/Combined cover if the Dwelling has its own Council Tax Band and does not attract business rates. Examples include B&Bs and homes where incidental business activity takes place. However, Flood Re can only accept policies that fulfil the definition of a “Home Insurance Policy”, where such policies are not being treated differently to non-Flood Re ceded policies.
If insurers are seeking to cover a home as part of a wider insurance policy, for example, a farmhouse under an existing farm policy, Flood Re expects a designated premium to relate to the Dwelling element and for the policy to meet the other eligibility criteria, including being in the name of an individual.
For the avoidance of doubt, Flood Re will only cover contents and fixtures and fittings that relate to the residential part of any mixed use premises. We would not expect appliances and trade tools used solely for business purposes (such as dog grooming appliances or hairdressing tools) to be covered by Flood Re’s definition of “Contents”.
Will Flood Re cover claims for resilient repair?
No. In line with its Transition Plan, Flood Re is currently carrying out research into the relative value and effectiveness of resilience measures and will report separately on its findings in due course. In the meanwhile, in accordance with the terms of the Treaty, Flood Re will not indemnify insurers for resilient repair. The definitions of “Loss” and “Flood Risk Element” currently preclude claims payments covering betterment for the purpose of potential resilient repair. Therefore, Flood Re will only indemnify insurers for the cost of like for like repairs and will not follow the fortunes of underlying policies even if they allow for betterment as a standard term. Any payments made to an insured above the cost of like for like repairs will be borne by the insurer. For the avoidance of doubt, where building work has to be completed to a higher standard due to a change in laws or regulations, then such build difference will not be considered “betterment”, provided it is the insurer’s normal practice to indemnify such cost within a New-for-old cover.
Will Flood Re cover contents that are located away from the insured property?
No. Flood Re will only reimburse insurers for damage done to contents located in the Dwelling affected by the flood in question. This is because the definition of “Contents” relates to the “Dwelling” in which they are located and the purpose of the Scheme is to help protect homes at risk of flooding and their contents.