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In 2011, the industry formally recommended Flood Re as a long-term flood insurance solution in the UK and after lengthy negotiations an outline agreement between the Government and the insurance industry was reached in June 2013. Since then the industry and Government have been working through the finer detail, and the Water Bill, legislating the powers to set up Flood Re has been working through Parliament. Royal Assent for the Water Bill was gained in May 2014. The Secondary Legislation which comprises of the regulations and the Scheme document, were laid before parliament in April 2015. This paves the way for the Secretary of State to designate Flood Re as the scheme administrator of the Flood Re scheme which we expect to happen after the election.
What is Flood Re?
The Flood Re scheme will be a not-for-profit flood reinsurance fund, owned and managed by the insurance industry, and established to ensure that those domestic properties in the UK at the highest risk of flooding can receive affordable cover for the flood element of their household property insurance.
Reinsurance is a way for insurers themselves to insure against large scale losses with other insurers. Insurers sell policies to their customers in the usual way, but then may pass the risk carried by those policies to a reinsurance company, or reinsurance vehicle – like Flood Re – where those risks are pooled into a fund which pays out to the insurer if claims are made. The contractual responsibility for paying out to the customers if a claim is made still rests with the original insurer – but they have their own back up from the reinsurance pool which they can claim against. This helps insurers take on more risk as the consequences of large claims are more widely spread.
A comparable, albeit different, scheme is Pool Re which covers insurers for loss incurred by terrorism and where some insurers choose to reinsure policies sold in case the losses are very high. This was set up in the 1990s after the IRA bombing of the City of London made insuring commercial risk prohibitively expensive.
How does it work?
Insurers will sell insurance in the normal way, and have an incentive to compete for the business of customers with high flood risk because they know they can pass the flood component element of the policy into Flood Re. The flood element of a home insurance policy will be placed in Flood Re, based on Council Tax band Insurers will use this facility for the 1-2% highest risk homes – an estimated 350,000 homes – that would have struggled to find any affordable cover in a normal market. If they are flooded those customers will deal with their insurer in the usual way to get their claim paid and Flood Re will reimburse the insurer behind the scenes for the cost of the claim.
Who is paying for it?
The insurance industry is paying the £10m set up costs to get Flood Re up and running. The Flood Re pool itself has two sources of income. The first is the flood element of the policies which are passed into it. The second is an additional levy on the industry, equivalent to the existing cross-subsidy that exists in the market.
You can find out more information on the Flood Re website.