Client briefing: flood insurance

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After much protracted discussion over the past year or so on the subject of flood insurance, the outcome is that the government and UK insurers have agreed to develop a not-for-profit flood fund in the form of a mutual reinsurance company (Flood Re). It is designed to last for 25 years and effectively has two key principles: (1) it will limit the amount that high-risk households have to pay its insurer members for the flood component of their home insurance (the maximum amount that a home owner will have to pay for the flood component of their home insurance will be capped by reference to the council tax band within which the property falls, so that owners of smaller homes will not have to pay as much for flood insurance as those in larger homes); and (2) the flood component of the premium will provide a fund to reinsure all floods up to a ‘once in 200 years’ event, i.e. 99.5 per cent of floods. The homeowner will buy home insurance as usual and the insurer can decide whether to cede the policy to Flood Re. In a situation where the homeowner makes a flood claim on a policy that has been ceded to Flood Re, the insurer will pay the claim directly and be reimbursed by Flood Re. On the government’s current estimation, it is expected that around 500,000 high-risk households would benefit from this scheme.

In June 2013, the government and ABI agreed a memorandum of understanding (MoU) on how to develop Flood Re. According to the ABI press release at the time, the key aspects of Flood Re are: premiums for the flood risk will be calculated based on council tax banding up to a maximum limit depending on the band; Flood Re would charge member firms (insurers) an annual charge of £180m, which equates to a levy of £10.50 on annual household premiums and represents the estimated level of cross subsidy that already exists between lower and higher flood risk premiums; and Flood Re will be designed to fully deal with at least 99.5 per cent of years. Even in the worst half a percent of years, Flood Re will cover losses up to those expected in a one-in-200 year — a year six times worse than 2007…

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