Flood Re

Development

In the absence of any proposals from Defra, the insurance industry developed a 'Flood Re' model with economic consultants Oxera. Flood Re, a not-for-profit scheme, which launched on 4 April 2016, is run and financed by insurers,(it is actually financed by increasing premiums for people whose homes are not at risk, and as such represent a fundamental change in the relationship between proposer and insurer; ie risk and premium are no longer related to one another), to cap domestic flood insurance prices keeping insurance premiums affordable for households in high-risk areas, and supersedes the previous Statement of Principles which was intended to expire in June 2013. During the development of Flood Re, the coverage of the Statement of Principles was extended initially until July 2013, then summer 2015, but continued until Flood Re came into force on 4 April 2016. Premiums are linked to council tax bands ensuring support is targeted at those on lower incomes.

The protection offered by the Flood Re scheme was not originally planned to be universal, but all Council Tax bands are now covered by the scheme. This enables wealthy individuals, for example with river front properties in the most expensive locations (e.g. the London/Thames area) to benefit from the subsidy. The money is provided by surcharging poorer members of the community whose homes are not at risk of flooding. Another advantage is that people who have made poor choices, or failed to take proper professional advice are fully protected by taking money from people who have made better judgements or acted prudently regarding professional advice. Insurance company profits are fully protected by the scheme which can be expected to escalate in cost year on year as it beds in. To avoid the scheme incentivising the building of homes on high flood risk land, houses that were built since 2009 are not covered by the scheme. The industry had called on the government to help fund a reinsurance scheme in the short term, before it became self-funding. However, under a "compromise" deal announced in June 2013, it was agreed that the government would not commit public funds to Flood Re. Instead, it has agreed to step in to provide "available resources" to fund relief if the country is hit by an especially costly flood, of the magnitude that would be expected to occur once in 200 years.

Flood Re is expected to be in place for 25 years, allowing a transition to a free market in flood insurance, reflecting the flood risk to a property and allowing homeowners in high flood risk properties to put in place mitigation measures over the 25 years so that insurance for the property remains affordable after Flood Re ends.

History (Statement of Principles)

A series of agreements on flood insurance have been made between governments in the UK and the insurance industry since the 1960s. These started with what is referred to as the "Gentleman‟s Agreement" more recently named the "Statement of Principles on the provision of flood insurance" after the year 2000. Following the serious UK flooding in 2000, which affected 10,000 properties in 700 locations and caused £1 billion of damage, the government and the Association of British Insurers drew up a statement of principles. Under the agreement ABI members agreed to continue offering insurance at existing rates to properties at high risk of flooding, if the government continued to invest in flood defences. The ABI became increasingly opposed to continuing with the Statement of Principles which it says created a two-tier insurance market in which non-members and new entrants did not have to insure properties in high risk flood areas. That meant new joiners could offer cheaper premiums than the insurers who did sign up to the agreement. The ABI stated in the consultation into the Statement of Principles that, "The SoP was only ever meant to be a temporary ‟sticking plaster‟" and that "New entrants to the home insurance market start from a position where they have no commitments under the agreement. This gives them a significant commercial advantage." In 2008 the UK government and the ABI agreed to revise and extend the Statement of Principles for one last five-year period.