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Flood Re – how it works

Updated: Feb 17

A recent article on the Insurance Age website caught my attention and led me to write this post.

The article in question concerned Flood Re (which will launch on 4th April 2016) and a suggestion that many insurers are planning to make the Flood Re scheme available through their direct distribution channels first, potentially leaving brokers at a disadvantage.

It went on to say that brokers should be asking insurers for confirmation that the Flood Re proposition will be available to them or whether they are offering the scheme through their other channels first.

If this is true, it raises some interesting ethical questions as well as TCF (Treating Customers Fairly) issues.

Notwithstanding this, given the impending launch of Flood Re it is worth looking at how the scheme will work.

Flood Re will take the flood risk element of home insurance from an insurer in return for a premium which will be based on the property’s council tax band. In addition, there will be an excess on the flood part of the policy of £250.

Insurers will retain control of pricing for the remainder of the home insurance and be able to set the excesses for individual customers. The idea is that this will benefit people living in areas of flooding as there will be a ‘level playing field’ for the flood element of the risk.

The fixed premium which is to be charged by Flood Re to insurers will be lower than would be the case if the flood risks were fully taken into account, as contributions to the costs will come from a statutory levy on all home insurers in the UK.

The premiums charged to insurers will be capped based on Council Tax bands in accordance with the following chart.

In order for a property to be eligible for the Flood Re scheme, they must meet all of the following criteria:

  1. The insurance contract must be held in the name of, or on trust for, one or more individuals or by the personal representative of an individual

  2. The property must have a domestic Council Tax band A to H (or equivalent)

  3. It must be used for residential purposes

  4. The insurance contract must have an individual premium

  5. The holder of the policy, or their immediate family, must live in the dwelling for some or all of the time (whether or not with others) or the dwelling must be unoccupied

  6. The dwelling must be built before 1st January 2009 (if a building is demolished, built pre 1st January 2009, and rebuilt, the new property is still eligible)

  7. The dwelling must be located within the UK – England, Wales, Scotland and Northern Ireland (excluding the Isle of Man and the Channel Islands)

For clarification and avoidance of doubt, all of the following risk categories will be interpreted as being eligible as long as they also meet the criteria 1-7 above:

A. Bed and breakfast premises paying Council Tax and insured under a Home insurance contract. B. Farmhouse dwellings and cottages. Where farmhouse dwellings are included in a commercial policy, provided the insurer can split out the dwelling element (which meets the criteria 1-7 (inclusive) above), that part of the risk can be ceded to Flood Re. C. Holiday/Second Homes D. Home workers E. Individual leaseholders protecting own property/flat F. Leasehold blocks will be eligible for buildings cover if they contain 3 units or fewer, and the freeholder(s) lives in one of the units to be insured G. Residential ‘buy to let’ Static Caravans/homes if in personal ownership H. Tenant’s / individual’s contents (even if living in large block/flats, where the buildings risk would not be eligible).

Domestic Properties not eligible for the Flood Re scheme:

A. Bed and breakfast premises paying business rates B. Blocks of residential flats C. Company houses/flats D. Contingent buildings policies (e.g. held by banks) E. Farm outbuildings F. Freeholders/leaseholders deriving commercial income insuring blocks/large numbers of properties in a portfolio G. Housing association residential properties H. Multi-use under commercial or private ownership I. Residential ‘buy to let’ (which do not meet the criteria 1-7 (inclusive) above) J. Social housing properties (eligible for Contents cover but not eligible for Buildings cover) K. Static caravan site owners (for commercial gain)

Small and medium enterprises (SMEs) and leasehold properties are not included in Flood Re as it is asserted that there is already an effective and competitive property insurance market covering them.

Neither the Association of British Insurers (ABI) nor the Government is currently aware of any evidence to suggest that affordable flood insurance will cease to be widely available for them in the future.

Personally, I am not convinced of this. It will be interesting to see what happens to the insurances of those businesses affected by this winter’s flooding.

Flood Re is designed to remain in place for 25 years with reviews taking place every 5 years.

There is, therefore, some element of certainty for those at risk of flooding in the short/medium term.

What the longer term holds remains to be seen. If flooding within the UK is seen as a fundamental rather than particular risk and the frequency increases, who knows what the flood insurance landscape will look like.

Acknowledgement – details of the Flood Re scheme taken from their website

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