British insurers group, government aim to get non-profit flood insurance framework running by 2015

The Association of British Insurers and the government there have reached a memorandum of understanding on how to develop a non-profit scheme for affordable and widely-available flood insurance.

The memorandum is a first step towards creating “Flood Re,” which aims to deliver affordable flood insurance to high risk households, according to the ABI.

“Getting to this stage has required compromise by both sides and there remain issues that need to be overcome,” Otto Thoresen, director general of the ABI noted in a statement.

“For Flood Re to be established successfully there needs to be an unprecedented level of partnership between the government and the industry,” he added. “But insurers and the government are now working towards a shared vision, with Flood Re as the government’s preferred choice.”

The British environment secretary, Owen Paterson, also acknowledged that hard work remains for the program to be successful.

According to the ABI, key elements of the framework are:

• Flood Re will be run and financed by insurers as a not-for-profit fund that will cover the cost of flood claims from high risk homes.

• Insurers will pass the flood risk element from those households deemed at high risk of flooding to the fund. Premiums for the flood risk will be calculated based on council tax banding up to a maximum limit depending on the band.

• Flood Re would charge member firms an annual charge of £180 million.This equates to a levy of £10.50 on annual household premiums and represents the estimated level of cross-subsidy that already exists between lower and higher flood risk premiums.

• Flood Re will be designed to fully deal with at least 99.5% of years. Even in the worst half a percent of years, Flood Re will cover losses up to those expected in a one in 200 year – a year six times worse than 2007 – with the government taking primary responsibility – working with the industry and Flood Re – for distributing any available resources to Flood Re policyholders should claims exceed that level.

The goal is to have Flood Re operational by the summer of 2015, assuming regulatory approval comes through and other governance issues are resolved, the ABI said. The framework would also have regular progress reviews to ensure it can continue running.