Tide Will Soon Turn For Flood Risk Insurance
The Tide Is About To Turn
As part of a 10 year deal with the Government, UK Insurers are committed to offering customers universal flood insurance at reasonable rates, even if they are in flood affected areas. This is providing that the Government invests in flood defences.
This agreement will expire on 30 June 2013. The consequence of this is that houses in flood affected areas may be uninsurable or only insurable at very high premiums or subject to conditions.
What Can Be Done To Stop This?
To avoid these terms, the government could intervene and offer some kind of subsidised cover for affected properties. Around 200,000 houses could be affected.
The issue has been under review by the government since at least as far back as April 2011. The Government, along with insurers and other interested parties have discussed several alternative models to cover flood risk properties. Negotiations stalled in late 2012.
An Environment, Food & Rural Affairs Select Committee has been set the task of reviewing a potential new scheme for setting the price of insurance for flood risk properties.
On 26 February 2013, the Select Committee met with representatives of the Association of British Insurers and major insurer AON.
Key points from the meeting
In this article we detail some of the key points we noted from the meeting transcript.
A video of the meeting can be viewed on the Parliament LiveTV website > Here
The Insurer’s Solution – Flood Re Model
Insurance industry representatives appear to be completely behind a scheme referred to as “Flood Re Model”.
This proposal would see a non-profit flood insurance fund created from a levy across insurers. The insurance industry contends this merely formalises the subsidy arrangement that effectively already exists through the current **Statement of Principles**.
Set price cover would be provided from the fund to those in high flood risk properties.
It is interesting to note that the set price product discussed is described by AON as a “Full Perils Policy” It just covers “flood”, not distinguishing between surface water run-off, river floods or coastal sea surges.
Translating “levy across insurers”
Of course it seems the levy across insurers would ultimately be funded by a relatively modest increase in lower risk property insurance premiums.
The ABI representative estimated an average increase in premiums of about £8 per household, broken down in to £5 on buildings insurance and £3 on to contents. The actual cost for the higher risk households would be determined by how the Flood Re pool limit is eventually set. (The pool limit required is estimated to be £2 billion)
When the Levy Breaks
There were 2 situations identified in the meeting which may undermine the “pool” method of insuring high risk properties. These would be a significant event early in the lifespan of the flood pool, or a significant catastrophic event that used up all available funds.
It is not clear how these situations would be dealt with in practice and how a shortfall between available funds and claims would be covered. The possibility of the Government shoring up funding is not ruled out.
An Alternative Solution
The main counter proposal against Flood Re Model is one going by the acronym of NOAH.
A solution devised by Marsh, Guy Carpenter and Landmark Information Group, NOAH covers the whole property market, not just properties of high flood risk. Flood-risk is calculated individually for each property and much of the risk is transferred back to the reinsurance market.
Summary
If the government and insurance industry are unable to reach agreement before July, there may be significant consequences for any flood-risk properties.
Such a property is likely to be un-mortgageable, with the obvious knock-on effect this would have on the value of the property.
Although a solution is still some time away, the tone of this recent meeting between the Select Committee and insurance industry as well as details on the alternative NOAH solution are encouraging.
There are on-going efforts to prevent financial catastrophe for flood risk-home owners after 30 June 2013 and we will await with great interest the outcome of further negotiations between those involved in coming up with a solution.
For more information about the forthcoming flood risk insurance changes and how it may affect property owners, please contact our Residential Conveyancing team. Telephone 01246 555111 or email using our contact form.
