There are already doubts as to whether Flood Re will in fact be able to deliver.
Mick Cairns is insurance director at Source Insurance
Ahead of its launch in April, the joint insurance industry/government sponsored Flood Re scheme has unveiled its first transition plan setting out its expected course over the next five years. It has also set out what the flood insurance market should look like when the scheme comes to an end in 2039, this date was set in order to provide a full 25 year period of cover.
I’m all for forward planning and as Flood Re was set up with a specific end date in mind, it’s right that those involved are looking to ensure that lower prices and excesses will be available to homeowners after the scheme ceases to operate. However I think I would prefer it if those involved focused on getting it up and running effectively to provide those in need with a solution that is fit for purpose now.
There are already doubts as to whether Flood Re will in fact be able to deliver.
The London School of Economics (LSE) published a paper a few weeks ago, before Flood Re issued its plan, predicting that it will fail to reduce flood risk and that the number of households in London eligible for the scheme could increase by up to 75% during its lifespan. Citing climate change and a high demand for housing, the LSE paper outlines how these factors would lead to a sharp increase in the number of properties at risk from surface water flooding.
It also pointed out that while properties built after 2009 will not be eligible to benefit from the scheme, the construction of new homes will reduce the permeability of the land resulting in an increased flood risk for older homes.
The authors of the LSE paper have called for the scheme to be redesigned to incentivise greater resilience to flooding, and I agree that this is where Flood Re appeared to fall down. The main emphasis within the Flood Re remit seems to be to provide everyone who lives in a property at risk of flooding with affordable and more importantly available property insurance but does very little to encourage or incentivise future mitigation of the risk of flooding.
While it is clear that we have a duty of care to provide affordable insurance for those homeowners in flood risk areas, we have to shift behaviours amongst those who will determine future risk levels. That means incentivising homeowners in risk areas to seriously review their properties and look at what measures they can take to make them more resilient to flooding. That means finding ways of ensuring that national and local government and developers work together to ensure the badly needed construction of new homes does not have an adverse impact on the risk to existing homes.
Interestingly the recently published Flood Re transition plan does talk about three programmes of work that it will undertake over the coming years. One of these will be to see how its data might be shared to help government, local authorities and others make decisions as to where spending and incentives would be most effective in cutting the cost of flooding. Another will be an initiative to provide the evidence base needed to determine how it may be possible to incentivise householders and insurers to take the most effective measures to protect homes.
The scheme will be funded primarily by a levy on every policyholder there is a reasonably complex calculation that sits behind the levy but on average it is likely to be around £10.50 per policy per annum. This will of course also attract IPT which as we know went up to 9.5% in the last budget statement from 6% this will add a further £1 to the levy as a consequence.
There will also be a number of specific exclusions from launch:
• Homes built from 1 January 2009
• Purpose built blocks of flats
• Houses converted into flats. But if the freeholder lives there and there are only one or two other units it can be part of Flood Re.
• Buy to let property where the landlord arranges insurance.
• Commercial property
• Mixed use property – for example flats over shops.
• Social housing buildings – but contents can be part of Flood Re.
Some insurers have already said that they will not be ready for the 1 April launch and as such will not participate in the scheme, however, they will still have to charge and pay the levy.
As weather patterns continue to change and flooding sadly becomes a more frequent occurrence in many areas, the rollout and ongoing management of Flood Re is going to be tremendously important to many of your clients. They’re going to be most interested naturally in getting the cover they need at a price they can afford now but it’s going to be equally important to keep them informed as to the future direction of flood insurance as for many, moving home isn’t an easy option.
