11 FUTURE DIRECTION IN 2013, A CONSULTATION WAS CONVENED BETWEEN...

3.11  Future  Direction  

In 2013, a consultation was convened between DEFRA, consumer representatives and the insurance

industry. Its principal aim was not to reform the entire UK flood insurance market but an attempt to

overcome a number of longstanding difficulties the UK has faced in attempting to balance both the

needs of at-risk householders and the insurance industry. A small but significant number of households,

which have been repeatedly flooded, were threatened with increased insurance premiums that for

many became unaffordable. The insurance industry had made it clear to the British government that

they would no longer be held to their previous commitment to continue to insure high-risk properties at

affordable premiums. Consumer welfare associations claimed that this eventuality would expose a

disproportionately high number of low-income households. The Association of British Insurers

estimated that up to two hundred thousand homes would be left uninsurable if the Statement of

Principles were to expire without a replacement agreement in place. This number is expected to

increase as a result of two phenomena. First, an increasing number of properties are at risk of flooding

due to more extreme weather patterns. Second, underwriters now have far improved flood risk

assessment tools to enable them to assess risk and match premiums accordingly (ABI, 2011). In the

UK, this has resulted in more accurate flood risk models and the redrawing of flood zone map

boundaries. This situation quickly became a political priority to resolve.

After a lengthy and difficult parliamentary consultation, in June 2013, the UK Government reached a ‘headline agreement’ with the insurance industry for a replacement of the Statement of Principles. The new system is an insurance pool called 'Flood Re'. The headline principle of 'Flood Re' are described in Box 1 Box 1: The Future of UK Flood Insurance for High Risk Properties: 'Flood Re'In June 2013, one month before the Statement of Principles was due to expire, the Association of British Insurers (ABI) reached an agreement with the UK Government to create a not-for-profit flood insurance pool known as 'Flood Re' aimed at the approximate 500k UK homes that are

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considered at high risk of flooding. The majority of the UK flood insurance market will not be affected by these changes. Premiums for homeowners not at high risk of flooding will continue to be risk based, and the market to sell such policies will be competitive. After lengthy and public disagreements between the UK government and the insurance industry over the future of UK flood insurance, both sides agreed a new solution was necessary. The Statement of Principles, the already extended previous agreement, was intended as only a temporary measure and the industry had come to regard it as commercially obsolete. Under the Statement of Principles, insurers were only obliged to continue to offer flood insurance to existing customers while insurers new to the market had the advantage that they were able to ‘cherry pick’ low risk customers and refuse policies for at risk properties. From a consumer perspective the regime was also failing as it did not guarantee affordable premiums or low deductibles. As well as being a potential electoral hinderance the UK government feared the Statement of Principles was societally deleterious as the number of high flood risk households able to find affordable flood insurance dwindled. Over time, the status quo would reduce the economic efficiency of the UK flood insurance market if choices of both insurers and consumers alike continued to be artificially restricted.The intention is that 'Flood Re' will set up a new flood pool to offer affordable flood insurance at a fixed price. Insurers will be able voluntarily to contribute to the ‘Floor Re’ pool any high-risk household they regard as not commercial to insure. The premiums within 'Flood Re' are capped based on Council Tax bands and are suggested to be £210 per year for the lowest band and £540 for the highest band. The premiums paid contribute to 'Flood Re' to pay for claims. In addition to revenue from capped premiums, it was agreed that all insurance companies with domestic policies would pay a levy of £10.50 per year on all home insurance policies. This is seen as cost neutral for consumers as under the Statement of Principles homeowners already contributed a similar sum as a cross subsidy from lower risk policies to higher flood risks. It is assumed that 'Flood Re' will begin operation in 2015. In the meantime members of the ABI will continue to honour their commitments under Statement of Principles. This means that cover will continue to be offered to existing policyholders where flood risk is assessed independently by the UK Department of the Environment to be not significant or where flood protection measures are planned to bring the risk below this level within a five year window. It is intended that 'Flood Re' will have sufficient reserves to cover losses up to a 1 in 200 year probability i.e. six times worse than in 2007 when the UK industry paid out record flood damages during what was described as the biggest peacetime civil emergency since the second world war. If there are catastrophic flood losses that 'Flood Re' cannot meet, it is not 100% clear what will happen. The MOU contained only a vague statement that the government would have ‘primary responsibility for an effective response’. It is not currently clear where a limit the UK government’s financial liability for 'Flood Re' lies.With Flood Re, there are exclusions. To avoid incentivising house building in high-risk zones, homeowners who purchased houses built after 2009 will not covered even of they are high risk. This same restriction was applied under the Statement of Principles. Also the scheme is aimed at making flood insurance available to lower income households and will not cover high price homes in the highest council tax band.Source: Securing the Future Availability and Affordability of Home insurance in Areas of Flood Risk (DEFRA1, 2013).

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The ‘Floor Re’ insurance pool is aimed at making affordable flood insurance available for high-risk households. The terms of 'Flood Re' outlined in a Memorandum of Understanding will undergo a public consultation over the remainder of the summer 2013. The results of this public consultation were not yet available at the time this thesis was submitted. It is, however, already predicted that it may

encounter problems with European competition laws (The Daily Telegraph, 2013). 'Flood Re' has many

critics who regard it as a political fudge that fails to address the fundamental problem of flood insurance

in the UK which is a lack of incentives for government to invest adequately in improved flood protection.