Following the Water Act 2014, the Government have announced their plans to introduce Flood Re, which is expected to roll out in July 2015.
What is Flood Re?
Flood Re is a not-for-profit financial scheme designed to ensure that affordable flood insurance is available for home owners in the most seriously affected areas. It is owned and managed by the insurance industry and has been created to protect against large scale losses.
What does Flood Re change for the consumer?
The process of obtaining flood insurance through standard home insurance policies will not change for consumers, as Flood Re is an internal protection measure for the insurers. The introduction of Flood Re could actually make insurance premiums more competitive as insurers will be able to pass the flood component of the policy to Flood Re. If a consumer needed to claim on their insurance policy, they would deal with the insurer in the normal way, Flood Re would simply sit behind the policy.
Where does the funding come from?
To fund this, there is an initial £10 million investment that the insurance industry is financially supporting. Going forward the Flood Re investment pool will have two sources of income:The first source will come from the existing flood component of the home insurance policy, and premiums will be capped based on Council Tax bands.
The second is that all home insurance premiums will carry a 2.2% levy (which equates to a national average of approximately £10.50 per policy). Contrary to recent reports, the Association of British Insurers have explained that “this will not lead to an ‘extra £10.50’ on customer bills; customers already pay the equivalent amount to cross-subsidise high flood risk already. The levy will simply formalise this arrangement.”
Together, it is hoped that this will create a contingency fund of £180m a year, which will contribute to the clean-up operations from future floods. However the floods of 2007 (that affected South Yorkshire and Humberside) cost the insurance industry £3bn to clean up; which highlights that this is only a transitional relief from much higher insurance premiums in the future for all homeowners.
According to the Environment Agency there are approximately 5.2m properties in the UK currently at risk of flooding, which equates to approximately 1 in 6 homes. If a property has suffered flood damage in the past, or if the property is within an identified flood risk area, it can sometimes be difficult to find insurance cover.
Flood Re ensures domestic properties within the UK that are in ‘high risk’ areas have access to affordable insurance policies.
However, Flood Re is not a lifetime guarantee of affordable insurance and homeowners will have to protect themselves against flooding in the future. This is why obtaining a Flood Protection Report by a Chartered Building Surveyor is so important. If insurance becomes unaffordable the value of the home is at risk. The Government Minister Lord de Mauley stated:
“We want households to become more aware of their risk. Therefore allowing them to make informed decisions and providing incentive for investment in flood defences and resilience at both the community and individual level. Adjustments in house prices whilst insurance premiums will be a necessary part of this transition. We believe that 25 years is a reasonable period of time in which to manage a gradual transition for those affected personally.”
The Flood Re approach raises other questions such as: How do valuers properly appraise residential assets where the guarantee of flood insurance cover is a shrinking asset? And if a homeowner typically takes a 25 year mortgage but there is only 15 years left on Flood Re, what then?
What properties are excluded?
Flood Re does not apply to commercial property; neither does it apply to leasehold properties which may include blocks of flats or the private rented sector. It doesn't apply to small and medium sized enterprises nor does it apply to properties above Council Tax Banding H.
All these exclusions make some of our prime assets vulnerable to capital swaps because of the issues and challenges raised by Basel III where the banks have to take a high level view of their capital adequacy.
How can Future Climate Info (FCI) help?
The latest guidance from the Law Society states that during conveyancing transactions, it should be established as to whether flood insurance is available before any binding commitments are entered into. FCI Essential, Standard and Premium Reports include an ‘insurability index’ that will highlight to the consumer whether insurance is attainable for their property. Not only do the FCI reports assist with best practice due diligence, but they are also compliant with Law Society guidance for environmental and flood.