Flood Re Subsidy Control Transparency
The UK-EU Trade and Cooperation Agreement requires that information on relevant subsidies should be made transparent by being made publicly available on an official website or public database within six months of granting a subsidy. BEIS has created a UK transparency database for this purpose – https://searchforuksubsidies.beis.gov.uk/ The below sets out:
- the purpose of the subsidy
- the categories of beneficiary
- the terms and conditions of eligibility for the subsidy and the basis for the calculation of the subsidy
Objectives of the Flood Re scheme
Flood Re is a joint government and industry re-insurance scheme established in April 2016 to address a market failure in the provision of accessible, affordable flood insurance to high flood risk properties across the UK. The Scheme’s secondary purpose is to manage, over the period of operation of the scheme, the transition to risk-reflective pricing of flood insurance for household premises by scheme wind up in 2039.
Customers do not deal directly with Flood Re; they purchase their insurance through the usual routes, but the flood risk element of their policy is ceded to Flood Re at a capped subsidised cost. When a customer makes a claim, the insurer pays the customer and in turn claims back the cost of that payment from Flood Re.
Legal
Prior to the UK’s exit from the EU, subsidies that were provided by member states to organisations were obliged to follow state aid rules. The European Commission (EC) concluded that the Flood Re scheme favoured the provision of insurance cover in an area where potentially no cover would be available, or only available at significant prices in the absence of state intervention. The Commission viewed the aid embedded in the Scheme as appropriate and necessary to provide a sufficient mitigation of flood risk, ensuring an affordable pricing to policy holders and to incentivise insurance companies to provide cover.
Although EU state aid rules no longer apply, the UK continues to have a number of international obligations in relation to subsidies.
From 1 January 2021 the scope of Flood Re’s subsidy control obligations is governed by the UK Government’s international commitments on subsidy control. These include the UK-EU Trade and Cooperation Agreement (TCA), other Free Trade Agreements (FTA) and World Trade Organisation (WTO) rules. As the Flood Re scheme falls under a ‘service based’ activity as set out in the agreements, the WTO and NI Protocol rules do not apply.
Flood Re’s scheme number for BEIS new subsidy control transparency database is SC10355 and operates from 1st January 2021. The scheme previously operated as an EC approved State Aid scheme, the exemption for which ended in March 2021. The EC decision not to object to the scheme can be found under reference number SA. 42596 on their website https://ec.europa.eu/info/index_en.
The legal basis for the Scheme comes from Part 4 of the Water Act 2014 (legislation.gov.uk).
Funding/Levy
The Scheme forms a ‘cross-subsidy’ in the insurance market. The Scheme is funded via a levy paid by all Relevant Insurers. Relevant Insurers contribute to the levy based on their market share of the UK home insurance market. The levy is currently set in legislation at £135m per annum and is Flood Re’s primary source of income.
The operation of the Scheme is set out on the website: How Flood Re works – Flood Re
Regulations 8, 9 and 10 of the Flood Reinsurance (Scheme Funding and Administration) Regulations 2015 (legislation.gov.uk) set out how the levy is calculated and operates.
Eligibility
Any household insurer can participate in the Scheme but they are not required to do so. If they choose not to do so, they must still pay into the levy based on their market share. When a customer makes a claim, the participating insurer will then be able to claim back the cost of the flood element of that claim from Flood Re, so that operationally the Scheme acts as a reinsurer. Flood Re is designed for the domestic market only. It does not apply to businesses or commercial leaseholds. Some categories of leaseholder are eligible.
Beneficiaries of the Scheme will need to meet the eligibility criteria, set out in regulation 5 of the Scheme Regulations https://www.legislation.gov.uk/uksi/2015/1902/regulation/5/made
The eligibility tool on Flood Re’s website also sets out who can be covered by the Scheme https://www.floodre.co.uk/can-flood-re-help-me/