7th January 2016

Flood Re – Too Little, Too Late?

In 2013, the Association of British Insurers (ABI) and the UK Government agreed a Memorandum of Understanding concerning a new not-for-profit scheme to make flood insurance as widely available and as affordable as possible.

Flooded village

The new scheme is called Flood Re, and it’s designed to allow for a sustainable transition to risk-reflective pricing over the next 25 years. From April 2015, insurers will be able to pass the flood risk elements of home insurance policies into a centralised fund set aside to pay any subsequent flood claim.

As a result, it is hoped that households situated in high-risk flooding areas will find it easier to obtain the flood insurance they need.

The Flood Insurance Statement of Principles

Flood Re is intended to replace the Flood Insurance Statement of Principles. First introduced in 2000, under this system the insurance industry was required to subsidise cover for those living on floodplains. While a typical flood-related payout stands at over £20,000, under the Statement of Principles, policyholders could get themselves covered for as little as £340 a year.

In exchange, the UK Government was obliged to invest heavily in flood defences. Reducing the likelihood of future flood claims was intended to offshoot the insurance industry’s subsidies, yet the ABI would later argue that the UK Government had not invested nearly enough in flood defence.

The Statement of Principles has long been viewed as unsustainable – ill-equipped to cope with the increased risk of flooding, and the subsequent rise in flood claims. Flood Re is the long overdue replacement, though as a scheme to help homeowners access affordable coverage, many believe that it’s seriously flawed.

The Problem With Flood Re

Flood Re places a £10.50 levy on household premiums across the country, which is intended to subsidise those living in high risk areas. But the storms of winter 2015 were so severe that thousands of homes and businesses that were either uninsured, or else previously considered low risk, are now having to cope with flooding and flood damage.

So even if Flood Re had been launched before December 2015, it’s doubtful that many of the afflicted properties would have been covered anyway.

On top of this, unlike the Statement of Principles, Flood Re does not cover commercial properties. So for the many small businesses who have seen their livelihoods shattered over the last few weeks, Flood Re would never have been any use in the first place.

A sequel scheme known as Flood Re 2 was proposed to help landlords, shops, and small businesses. But it’s been pointed out that the high cost of establishing Flood Re 2 could not be justified, given that it will only result in a marginal corresponding drop in premiums.

Flood Re 2 has been scrapped, and there are doubts that Flood Re would have been able to help all those affected by the recent flooding. Meanwhile, the UK Government has pledged to invest at least £2.3bn in flood defences over the next six years.

What more can be done?

According to the Environmental Agency, the body that’s currently responsible for handling flood response, a “complete rethink” is required. As Britain moves from “known extremes to unknown extremes” in its weather patterns, it’s hard to shake the notion that nothing that’s worked previously will ever work for us again.

So given that it was devised before the floods, and given that it’ll only be implemented months afterwards, Flood Re just might be too little too late.

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