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Flood Re’s regulations in U.K. now in effect


November 12, 2015   by Canadian Underwriter


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The signing of Flood Re’s regulations in the United Kingdom means as many as a half million households in high flood risk areas have moved one step closer to affordable flood insurance and away from spiralling home insurance premiums.

Rory Stewart

Following approval from U.K. Parliament, floods minister Rory Stewart (pictured left) signed the regulations Wednesday, providing Flood Re, a pooled insurance system, “with necessary powers that will enable insurers to provide affordable flood insurance to at-risk homeowners across the U.K.,” notes a government statement.

How does Flood Re work? A Flood Re backgrounder explains that insurance companies can pass on the flood risk element of eligible home insurance policies to Flood Re, which, in turn, will charge the insurers a premium for each policy, based on the property’s council tax band.

It is estimated that insurers will pass on the flood risk element of buildings, contents or combined home insurance policies for about 350,000 households.

“Flooding can devastate people’s lives and homes, and while nothing can take away the distress it can cause, having access to affordable insurance will give people peace of mind,” Stewart says in the government statement. “Flood Re will, for the first time, ensure access to affordable flood insurance for people regardless of where they live,” the minister adds.

Welcoming the regulations and noting that they give Flood Re its statutory underpinning, Flood Re CEO Brendan McCafferty notes the program will continue to work with the insurance industry, regulators and others.

“We are working towards an operational start in April 2016 and look forward to delivering on our commitment to helping insurers provide consumers with access to affordable flood insurance,” McCafferty says.

Flood Re regulations now in effect in U.K.

The backgrounder explains that insurers cannot continue to follow the U.K.’s Flood Insurance Statement of Principles, in place since 2000, in light of the rising flood risk. It was estimated 350,000 flood risk U.K. households “would struggle to obtain affordably priced flood insurance without a scheme like Flood Re.”

The “Statement was only ever intended to be a temporary measure and restricted customer choice as insurers only had commitments to their existing customers, and new insurers can decide to whom they offer flood insurance,” the backgrounder adds.

Financial regulators – the Prudential Regulation Authority and Financial Conduct Authority – are currently considering Flood Re’s application for authorization as part of routine regulatory duties.

“Flooding is the greatest environmental threat the UK faces and the risk is rising,” notes an Association of British Insurers (ABI) briefing released last week.

Noting that Flood Re is only part of the solution, ABI reports that “the most effective way to protect communities at risk of flooding from rivers and the sea is with well-maintained defences and an increasing risk of more extreme flooding means there is a greater need than ever for investment in new defences to properly protect our communities.”

To adequately address the rising risk of flooding, the briefing states that “current and future U.K. governments must significantly increase funding to £1 billion per year by 2025 to build new and properly maintain existing flood defences.”

ABI contends “the governments of the U.K. must consider more aspects than ever before in flood risk management if real solutions can be taken forward that effectively tackle the problem of flooding. Over the long term, flood risk needs to be managed within an overall strategy of managing land and water.”

Part of the scheme of Flood Re – which the backgrounder notes will only operate for 25 years – includes “offering help to people to increase their understanding of their level of flood risk and explaining how they can take action to reduce their risk, where possible.”

The 25 years allows time for the U.K. government, local authorities, insurers and communities to become better prepared for flooding. “This could mean, for example, making use of effective land planning, sustainable drainage, sustainable development and effective flood risk management,” it adds.

Related: U.K. agreement to help make flood insurance affordable in high-risk areas