Good or bad news on the flood insurance front?

Increasingly severe flood events, climate change, new housing in flood plains, inadequate government spending on flood defences – these all point to increasing risk of flooding for more and more properties.

It is therefore not surprising that insurers have been talking to the government about ways of continuing to provide affordable flood insurance to those people at most risk.  In June 2013 these talks resulted in a decision to establish a fund, called Flood Re, to insure the highest risk properties.  The aim is for Flood Re to be in operation by June 2015, though some consider that this is an optimistic timescale.

Background

In most countries, insurance against flooding is subsidised by the government, since if left to be provided by insurers alone, those properties at greatest risk of flooding would be uninsurable.  The UK is therefore unusual in that since the 1960s flood cover for householders and small businesses has been automatically provided as standard, with insurers in effect ensuring that low risk properties subsidised the high risk ones.  However, with the risks increasing on every side, the insurance industry considered it could not continue to provide the same level of cover without some form of government support.

Features of Flood Re

Insurers had envisaged that the government (i.e. all taxpayers) would fund Flood Re, but it has refused to.  Instead, homeowners will fund Flood Re through increased premiums which insurers will charge and put into the fund.  This is intended to produce £180m each year for the next five years.  Accordingly, the cost of providing affordable insurance to those in high risk properties will fall on all the other householders (with houses in the higher council tax bands paying proportionately more).  Controversially, the following are currently excluded from the scheme:

• properties in Council Tax Band H and its equivalent, even though they will still have to pay the highest extra flood premiums;
• businesses (with the possible exception of bed
• and breakfasts);
• properties occupied by tenants;
• homes built after January 2009, after which time properties should not have been built in flood plains.

Implications

While the proposals (seen by some as unfair and unworkable) may change, if they remain as they are the implications will include the following:

• many properties will fall outside the scheme, whilst still being in flood prone areas, so becoming either much more expensive or impossible to insure;
• flood prone areas may become blighted, also affecting businesses in those areas;
• owners of homes built in flood plains after January 2009 would be penalised for the actions of planners and developers;
• should there be a flood event which wipes out Flood Re, the fund will need to be built up by further premium increases;
• if flood defences are not made more effective, the fund is likely to be exhausted more quickly;
• homes which are outside the scheme are likely to lose value and be worse security for lenders;
• the effects of climate change can only make it more difficult for the scheme to work.

Hopefully the scheme, in whatever form, will work.  If it does not, then the only viable solution may be for the UK to fall into line with most other countries, with the government providing more financial support.