A flood of claims

Before the recent decision to name our storms, the number of flooding incidents over recent years has pushed up premiums for flood risks to uneconomic levels.  A long term solution to this problem has been in the making since 2011 for at risk properties.  Last November, regulations were made which bring closer the advent of a proper flood insurance scheme.

The scheme will be called “Flood Re”.  Approval from the Prudential Regulation Authority (the UK regulator responsible for the prudential regulation of systemically important financial institutions) is needed before Flood Re can begin to offer cover, which is expected to be in place in around April this year.

In brief, in situations where an insurer is not prepared to underwrite the risk of flooding themselves, Flood Re will provide insurers with the opportunity to buy subsidised reinsurance against flood risks.  The scheme has an expected lifespan of 25 years and is to operate for the highest 1-2% riskiest properties – around 350,000 homes in the UK.

Premiums will be set by reference to the Council Tax band of a property and will be capped.  The detail is in the regulations.  The excess payable for claims under Flood Re policies will initially be limited to £250 or, if higher, the excess applied by the insurer under the policy.

Not all properties can benefit from Flood Re insurance.  Those that do not qualify will need to obtain flood insurance cover in the open market.  The properties that do not qualify include:

• All commercial and mixed use properties.
• Any residential property built since 1 January 2009.
• Buy to let residential properties where the landlord arranges the buildings insurance.
• Purpose built flats and most houses converted into flats.

These properties will continue to be subject to market-driven premiums and excesses for flood cover.

It will be necessary for buyers of property to ascertain the level of risk of flooding for that property and to make enquiries as to the availability of insurance within the Flood Re scheme.  If it is not available, it will be necessary to consider whether insurance can be obtained at a rate which is economically viable.

The £10 million setup cost for the scheme is being paid for by the insurance industry and Flood Re, which will operate as a none for profit organisation, will be financed annually out of a levy payable across the insurance industry in addition to the premiums collected.

Flood Re is good news for many owner/occupiers of residential property.  The categories of property excluded are wide and it therefore remains to be seen in the medium to long term, whether properties which have a high risk of flooding can remain to be viably insured where they are not covered by the scheme.

For advice on the application of the Flood Re scheme or of the flooding risk for a particular property, please contact Simon Ralphs.