Flood insurance - Commons Library StandardNotePublished 28 June 2013 | Standard notes SN06613

Amended 03 January 2014

Authors: Tim Edmonds

Topic: Environmental protection, Financial services, Flooding, Water

The continued general availability of domestic flood insurance at reasonable cost has been under pressurefor some years following an increase in the number and severity of flood events. New arrangements toensure that affordable flood insurance remains widely available were subject to industry and governmentdebate for two years against the backdrop of a temporary agreement set to expire in the summer of 2013.

This note discusses the background to this issue, explains the final agreed solution and describes whathouseholders can do to keep their flood-related insurance premiums down.

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1 of 1 06-02-2014 13:10

Household flood insurance

Standard Note: SN/BT6613

Last updated: 3 January 2014

Author: Oliver Bennett; Timothy Edmonds

Section Science and Environment; Business & Transport Section

The continued general availability of domestic flood insurance at reasonable cost has been

under pressure for some years following an increase in the number and severity of flood

events. New arrangements to ensure that affordable flood insurance remains widely

available were subject to industry and government debate for two years against the backdrop

of a temporary agreement set to expire in the summer of 2013.

Measures to provide a more permanent solution to the problem of flood insurance non-

availability formed part of the Water Bill which is currently before the House. A Library

Research Paper includes some of these details.

This note discusses the background to this issue, explains the final agreed solution and

describes what householders can do to keep their flood-related insurance premiums down.

Information about the insurance aspects of this topic should be addressed to Timothy

Edmonds. Information concerned more directly to flood defence measures to Oliver Bennett.

This information is provided to Members of Parliament in support of their parliamentary duties

and is not intended to address the specific circumstances of any particular individual. It should

not be relied upon as being up to date; the law or policies may have changed since it was last

updated; and it should not be relied upon as legal or professional advice or as a substitute for

it. A suitably qualified professional should be consulted if specific advice or information is

required.

This information is provided subject to our general terms and conditions which are available

online or may be provided on request in hard copy. Authors are available to discuss the

content of this briefing with Members and their staff, but not with the general public.

2

Contents

1 Introduction 2

2 The original statement of principles 3

3 The build up to 2013 4

3.1 The Flood Summit working group 4

4 Agreement at last 10

5 How can flood-related insurance premiums currently be reduced? 12

5.1 Property-level measures 12

5.2 Flood defences 13

1 Introduction

Household flood risk in the UK is typically covered by standard household insurance—in

many other countries the Government is the insurer of last resort for flooding or flood

insurance is bought separately from normal household insurance.1 Currently, insurance

premiums often do not fully reflect the actual flood risk to properties. As a result “the costs of

flood damage are often shared between the premiums of all householders, whether or not

they are at risk of flooding”. This cross-subsidy means that “many householders living in

high-risk properties may not be paying a price which reflects the risk”.2

Insurance is fundamentally a way of reflecting and reducing risk. If all groups face generally

the same risk of an event, standardised levels of premiums can be used to pool the risk fairly

between the population. However, as incidences of localised flooding appear to have

become more common over the past ten years or so insurers have faced a dilemma. They

can either carry on as before, and face huge claims from a minority of claimants which make

the service unprofitable, or, due to better statistical and environmental data, restrict the

availability of insurance offered to exclude areas prone to flooding or introduce substantially

differentiated premiums for people in different areas.

Since the former option is not sustainable in a commercial way in the long term, left to itself

the industry will adopt the second option. But the consequences of this are not attractive

socially. Properties with a flood claims experience would face huge increases in premiums if

their policies were to be commercially viable. If they chose to restrict cover, it would create

enormous problems for large sections of the property market. Unlike car insurance, buildings

insurance is not mandatory however, it would be virtually impossible to get a mortgage on

any property that was not fully insured. Hence, such properties would become unsalable

1 The Pitt Review: Learning lessons from the 2007 floods, Cabinet Office, June 2008 2 Flooding and insurance: a roadmap to 2013 and beyond: An interim report of the flood insurance working

groups, Defra, May 2011

3

except at substantially reduced prices. From a consumer ‘PR’ point of view, both outcomes

are unattractive to the industry.

The industry has already adapted to a degree. The cross-subsidy is expected to diminish

over coming years as insurers more accurately reflect flood insurance risk in premiums. This

may lead to lower insurance costs for most people, but large cost increases for those in high

flood risk areas.3 Some insurers already decline to insure in certain areas, or will continue to

do so only for existing customers. Mindful of the social consequences of a market failure, the

government has sought with the industry to find a long term solution which encompasses a

reduction in the totality of risks (better flood defences) and a continuation to a degree of the

traditional pooling of risks pricing model. What emerged was a ‘pact’ between both sides

which would be governed by agreed statement of principles.

2 The original statement of principles

Flood insurance provision was guided by a statement of principles first agreed in 2002

between the then government and the Association of British Insurers (ABI). This was a set of

commitments by the industry to provide flood insurance for domestic properties and small

businesses “for as many customers as possible”. Insurance premiums and other terms—

such as excesses—would be based on an assessment of the risk of flooding “but will be

offered in a competitive market”. It also stated that continued provision of insurance was

dependent upon action by the Government to reduce flood risk by investing in defences. Put

simply, the industry would provide cover where homes were protected at or above

government minimum standards of flood defence and those properties which would be

covered in the future by planned improvements to flood defences. An ABI press release

outlined the key terms of the agreement:

The ABI’s new Statement of Principles sets out a basic approach for member

companies providing flood insurance. It will ensure that there is a competitive market

for insurance based on the actual risks of flooding. It will apply from 1st January 2003

and will replace the current temporary agreement that was created by the industry

following the floods of autumn 2000.

The Statement of Principles has five objectives

full access to a competitive market for insurance for the vast majority of

homeowners and small businesses;

improved security for those who live and work in high-risk areas;

new provisions for those who wish to sell their homes or businesses;

better use of new solutions to make properties insurable, even in high-risk areas

where improvements to flood defences are not planned;

a clear incentive for Government and local authorities to continue to invest in flood

defences.

Around one in ten of the UK’s 20 million homes and businesses is situated in the

floodplain. The vast majority of these – around three quarters – are protected against

the risk of flooding at or above the Government’s own minimum standards, and ABI

members will continue to make flood cover available for them as a standard feature of

3 Flood risk and insurance: A roadmap to 2013 and beyond: Final report of the flood insurance working groups,

Defra, December 2011

4

household and small business policies. Premiums and other contract terms will reflect

the different levels of flood risk, as they do for other factors such as crime.

The new Statement of Principles will also benefit policyholders who face higher risks of

flooding (i.e. are not protected to the Government’s minimum standards). Where

improvements in flood defences sufficient to meet the Government’s standards are

scheduled for completion by 2007, insurers will maintain flood cover for homes and

small businesses which they already insure. Going beyond the terms of the existing

two-year agreement, insurers will also make special efforts to maintain cover for

properties when they are sold, subject to satisfactory information about the new

owners and proposed use of the premises.

Where improvements in flood defences are not planned, insurers will “examine the

risks on a case by case basis and use their best efforts to continue to provide cover.”

The Statement of Principles commits insurers to work with policyholders where

necessary to see if action can be taken to make the property insurable. This might

include the use of accredited flood protection products and temporary defences.4

Extreme rainfall in 2007 led to widespread flooding in England and Wales. It was arguably

the largest peacetime emergency since World War II, causing 13 deaths and £3.2 billion in

damage.5 6 In response the Labour Government commissioned Sir Michael Pitt to undertake

an independent review of the floods. It concluded that “urgent and fundamental” changes

were needed to reduce flood risk. However, it generally supported the arrangements for flood

insurance provision.

Following a review of flood insurance in 2008 the ABI and Government updated the

statement of principles. It ensured that cover would continue to be available to the vast

majority of householders. The Department for Environment, Food and Rural Affairs (Defra)

website summarised the changes:

The revised statement... ensures that flood cover will be available as a standard

feature of household and small business policies for a) those properties defended to a

minimum standard of 1 in 75 (in other words where the design standard of defences is

such that the probability of the properties being flooded in any single year is 1.3% or

less), or b) for those properties where such defences are scheduled for completion

within the next five years. Premiums will continue to reflect different degrees of risk.7

The statement does not apply to buildings constructed after 1 January 2009..8

3 The build up to 2013

3.1 The Flood Summit working group

The period up to 2013 was characterised by efforts on behalf of both the industry and

government to find a long term solution. The Government hosted a Flood Summit in

4 Statement of Principles, ABI press release November 2002 5 The cost of the 2007 floods, Environment Agency, January 2010 6 The Pitt Review: Learning lessons from the 2007 floods, Cabinet Office, June 2008 7 Defra Website as of 10 December 2009 8 Flooding and insurance: a roadmap to 2013 and beyond: An interim report of the flood insurance working

groups, Defra, May 2011

5

September 2010 to discuss what would happen to flood insurance after 2013.9 Three working

groups were set up to take forward a work programme. The groups were comprised of

representatives from Government, the Environment Agency, the insurance industry and

related organisations. Working Group 1 considered future flood insurance models. The

Group agreed a set of common principles that a model should address:

1. Insurance cover for flooding should be widely available

2. Flood insurance premiums and excesses should reflect the risk of flood damage to

the property insured, taking into account any resistance or resilience measures

3. The provision of flood insurance should be equitable

4. The model should not distort competition between insurance firms

5. Any new model should be practical and deliverable

6. Any new model should encourage the take up of flood insurance, especially by low-

income households

7. Where economically viable, affordable and technically possible, investment in flood

risk management activity including resilience and other measures to reduce flood risk

should be encouraged. This includes, but is not limited to direct Government

investment

8. Any new model should be sustainable in the long run, affordable to the public purse

and offer value for money to the taxpayer10

The Group raised concerns about the future affordability of flood insurance for those in high

flood risk areas, particularly for those on low incomes:

The Group agreed that the primary problem in the future will be the affordability, rather

than the availability, of flood insurance premiums for households and small

businesses. There are two main causes of this:

As the level of cross-subsidy in the market decreases there will be a small benefit

for many and a potentially large cost for a few homes at high risk of flooding. There

should be further analysis done to quantify the size of these costs and benefits and

who receives them.

Climate change means that the frequency, severity and type of flooding will

change. The impact of this flooding on the cost of insurance premiums will depend

on both the success of flood defences in preventing damage and the extent to

which properties are vulnerable, i.e. the number of properties that are built in high-

risk areas. Account should be taken of the risk presented by surface water flooding,

including how the pattern of future development affects run-off of surface water.

The resulting rising costs of repair are likely to create an upward pressure on

premiums across the board.

Combined, these effects are likely to result in premium increases for those at the

highest risk unless steps are taken to manage exposure. This will be harder to bear for

households on lower incomes so further analysis should be undertaken to show which

people, and how many, will be uninsured or under-insured as a result.

9 Flooding and insurance: a roadmap to 2013 and beyond: An interim report of the flood insurance working

groups, Defra, May 2011 10 Ibid, Defra, May 2011

6

It is difficult to predict the extent of any problems with availability of cover as these

depend on reactions of the market. However, it is far more likely that households will

go without cover because they can’t afford it than because there is not an insurer

willing to provide it.

Future analysis should look to identify and quantify the specific communities or income

groups who might require support as a result of these changes. This is crucial in

informing decisions about how and if interventions in the market for flood insurance

should address the problem. It will also be important to understand over what

timescale changes will take place.

The Group has identified several possible secondary consequences of reduced levels

of flood insurance. They include mortgageability, and increased economic cost of

flooding as well as health and welfare implications. These should be included in any

assessment of the value of Government action.11

A number of suggestions were made about a replacement insurance model. For example,

the ABI suggested “a free market for flood insurance, and thoughts on how flood insurance

could potentially be subsidised above a certain premium threshold”.12 Alternatively the

National Flood Forum proposed “a pooling arrangement for flood risk, with equal flood risk

premiums regardless of risk”.13 However the Group did not settle on any one model—it said

more information and analysis was required. The following actions were proposed:

1. The British Insurance Brokers’ Associations (BIBA) has worked with the Group to

produce a guide, including ‘top tips’ for those who are struggling to access flood

insurance.

2. A similar signposting guide will be produced for insurers to encourage them to

signpost effectively for those who are struggling to find cover.

3. An agreement should be developed which ensures that industry signposting follows

best practice.

4. The Government will look at further ways to encourage take up of insurance by low-

income households, including the potential of insurance-with-rent schemes for social

housing.

5. The Government will decide whether a pooling model represents value for money.

Work will be undertaken to:

i. Assess mechanisms for entry to the pool, particularly bearing in mind the

relationship between equity considerations and administrative costs

ii. Assess level of subsidy required and what pooling approach best represents

value for money

iii. Decide whether there are better mechanisms for delivering a subsidy which

achieve the same end

6. Work should be undertaken to look at ways local authorities can take insurability into

account when developing their flood risk management strategies.

11 Flood risk and insurance: A roadmap to 2013 and beyond: Final report of the flood insurance working groups,

Defra, December 2011 12 Flooding and insurance: a roadmap to 2013 and beyond: An interim report of the flood insurance working

groups, Defra, May 2011 13 Ibid, Defra, May 2011

7

7. Analysis should be undertaken to give an idea of the pace of any changes in the

market for flood insurance and to quantify the extent of their impacts.14

The Government was not supportive of any future model that involved a public subsidy of

insurance premiums.15 However, the Minister, on 19 December 2011 said the Government

would consider “what additional measures might help safeguard the affordability of flood

insurance for households”, and that it would make an announcement in 2012:

As part of this ongoing work we will be considering the feasibility, value for money and

deliverability of targeting funds to help those most in need, building on the analysis

undertaken by the working groups established after last year’s flood summit. This may

include models where communities might work together to secure affordable

insurance.

These options will be considered over the winter months in order to make further

announcements in [spring 2012].16

The Government continued negotiations with insurers throughout 2012. In July 2012 it

considered a pool insurance option:

As part of discussions, the Government is now considering how the existing cross-

subsidy that takes place within the insurance industry can be adjusted to make sure

insurance prices remain affordable. Most insurance companies already raise a small

sum from policy holders to cover the cost of insuring homes at high risk of flooding.

The insurance industry has asked the Government to formalise this arrangement, so

that all households can continue to get affordable insurance, and to correct a current

imbalance in the market whereby some insurers are at an advantage in being able to

solely offer products to low risk customers whereas others currently have to offer cover

to many high risk properties.17

In September 2012, it was reported that an agreement had been close, but that the

Government had concerns that the option put forward by industry would lead to unacceptable

increases in insurance premiums for everyone.18 The Government failed to produce its own

proposals in 2012 despite saying it would.

The preferred plan of the insurers was for a flood insurance fund to be built up from levies on

all properties. This fund would meet emergency claims on the scale of those recently made

and would moderate the need for extreme premium price rises. In November 2012 the ABI

produced its version of the main unresolved issue between it and government:

The ABI has called for the Government to commit to a joint solution to ensure long

term affordable flood insurance for high-risk households, describing the current state of

talks aimed at reaching an agreement as being at an impasse.

This follows the Government’s refusal to consider providing a temporary overdraft

facility to a proposed not-for-profit special insurance fund for 200,000 high-risk

households which will otherwise struggle to get affordable household insurance when

the current arrangements come to an end next year. The temporary overdraft facility

14 Flood risk and insurance: A roadmap to 2013 and beyond: Final report of the flood insurance working groups,

Defra, December 2011 15 HC Deb 19 December 2011 c140WS 16 HC Deb 19 December 2011 c140WS 17 Progress on affordable flood insurance, Defra, 11 July 2012 18 Flood waters raise fears over home insurance, The Guardian, 26 September 2012

8

would be used to pay claims if there were 2007-style floods in the early years of the

scheme before it had built up its reserves."19

In March 2013 the Environment Committee held evidence sessions which looked at the

question of a post principles solution. Speaking on behalf of the ABI, Nick Starling outlined

the consequences of no extension of the statement of principles and no ‘Flood Re’ solution:

If there was no legislation in place and if Flood Re was not agreed, then we would

have the free market, and we reckon the implications of that are that around 200,000

households would find insurance either unaffordable or unobtainable. That is the sort

of scenario we are looking at. If there is an agreement on Flood Re coming into place,

no doubt part of that would be looking at what transitional arrangements there might

be.20

Later a representative of the insurance broking industry, suggested that the number of

people who were truly uninsurable, at any price, was significantly less, about 10,000.21

The witnesses were also asked about an alternative to Flood Re, namely a mutualisation of

flood risks, where, some proportion of claims would be paid for by all insurers after the event,

rather than from a prior fund. Mr Starling commented:

Obviously I have not seen what their system is. It sounds a little bit like Noah, where all

the flood risk is seeded and goes into a mutual pool. The reason that we developed

Flood Re is because in a free market there will be circumstances where the risk

reflective premium is too high for most people, or it is just not available. If you look at

Germany, for example, it has a flood zone system, and in the highest flood zone it is

effectively impossible to buy flood insurance. Our members could operate within that

market, but it just means that for some people the cost would be unaffordable. That is

why we have put forward Flood Re as a way of meeting that cost. It is designed to

have minimal impact, with a levy that is as low as possible, but it needs a back-stop in

circumstances where there is a very large event in the early years and the levy needs

to increase to pay that back. It is really around these issues of affordability as much as

anything else that we think this model needs to be developed. I cannot comment on

the one that has been mentioned to you, but the issue around Noah, which it sounds

similar to, is that it does not guarantee that affordability.22

Another witness, from the insurer Marsh Ltd, outlined the differences between Flood Re and

Flood Mu as it is called:

Let me start with concerns with Flood Re; then I have notes on five significant

differences, which I will get to very quickly. As for the concerns with the design as is,

they are both pooling arrangements, so they both assume that you need to redistribute

risk to keep affordability in place for the high-risk homes, particularly those of poorer

householders. The question is how you do it. I already made the comment about the

passing of risk to the Government, and through a tariff mechanism it is likely to end up

with the customer. It seems strange to me that essentially you have got the insurers

acting as Government in making social policy, pricing off wealth rather than risk, and

you have got the Government acting as the insurer, taking the back-stop on the pool,

which has been observed. That is what the reinsurance industry exists for; there are

about £13 billion of category excess reinsurance treaties out there already, so it is well

above any conceivable event. The tail is cheap to insure, by the way. It is not a 19 ABI press release November 2012 20 Environment, Food & Rural Affairs Select Committee; oral evidence session 20 March 2013,Q199 21 Ibid Q250 22 Ibid Q216

9

problem to take it within the industry if it needs to. It does not give the Government

enough skin in the game. I think the Government is taking the tail in Flood Re because

they want the Government to feel some ownership for building flood defences. It is the

wrong place to put the Government. The Government should be in at the beginning,

applying social policy. It happens to be a smaller number; it is also a much more

bounded number. I imagine the Government has had enough of back-stopping

financial institutions. It plays the role and leaves the existing Catastrophe XL to take

care of the tail.

The next biggest concern is it flattens the cost of risk. You have this £300 set charge.

My concern with that-look again at the banking crisis and the mispricing of risky and

subprime mortgages-is that you are going to create some unforeseen consequences

when you do that. Builders, planners, owners are going to find it attractive; above that

threshold risk is no longer paid for, and that is a dangerous place to be. The final and

biggest concern is that it is going to cost a lot because of exactly the point you were

making: it invokes a whole new entity, Flood Re, which is effectively an insurer. It then

needs to buy reinsurance in a spot where reinsurance is the wrong thing to use,

because those risks are concentrated, regular, known. Reinsurers like to diversify their

risks. Reinsurance is a very expensive proposition, and it is probably why a reinsurer is

attached to the ABI proposal. It is good news for the reinsurance industry; it is not

particularly good news for the consumer, who will end up paying for that cost through

the tariff.

I come to my six points on what is different. We would argue for a percentage, not a

flat rate, because that leaves risks with the creators of that risk, from the builder to the

owner to the insurer, into the reinsurance market. We would argue for doing it on

claims, not premium; because claims are real, it leaves premium and the pricing of

premium to be set by the market, and it makes it much harder to form a tariff. As soon

as you allow a tariff to be formed-a preset, known amount, be it £8 or £20, and we will

argue about that later, I am sure-it is very tempting, that implicit or explicit charge.

The second point is claims, not premium. Third, we would do it post event, not up front.

Do not create a new pool; simply reallocate the costs as they arise, then use the

existing structures. That is what insurers exist for, to distribute these risks. That is why

they have reinsurance. Fourthly, we would put the Government in, as I have

mentioned, via social intervention, not as a de facto reinsurer. That is what

Governments do all the time, and how it is done is to be decided by the Government.

Finally, that would leave you with a simple clearing house for the claims, rather than

creating this whole new entity. Those are the differences. We think it has a number of

advantages. I will not list those, because they are set out in the paper.23

As part of evidence to the same enquiry, the Minister, Owen Patterson, outlined the current

government’s spending plans:

We will be spending £2.3 billion over the course of this Parliament. We went to the

Treasury and under particularly difficult circumstances we got another £120 million in

the autumn statement. If you add in the nearly £148 million we are bringing in from

partnership funding schemes, which also lead to much better value, we can say that

over the four years of this Coalition Government we will be spending more on flood

defences than on the preceding four years. We have made a very strong case for

this.24

He outlined the difficulties involved with finding a replacement for the Statement of Principles:

23 Ibid Q243 24 Environment, Food & Rural Affairs Select Committee; oral evidence session 26 March 2013,Q294

10

The ABI has a number of ideas on how we replace the statement of principles. We

have our own comments on those. I talked to the ABI on the telephone on Friday. I had

a meeting with the ABI yesterday. I have another meeting with the ABI tomorrow. We

really are working on this in a very intense manner, but there is no point in coming up

with an agreement just for the sake of it. We have to get it right. To answer your

question, though, we do have the Water Bill coming through as a vehicle at the end of

the summer. It is almost certain that whatever solution we come up with, it will need

some primary legislation and the ABI is perfectly well aware of that. We have a

massive interest with them in getting this right for the long term and coming to a

solution. We really are working very closely with them.

Chair: Realistically, it cannot be in the Water Bill because we are probably not going to

see that before June. The chances of getting primary legislation through before the end

of June to deliver a replacement to the statement of principles-it is quite a tall order.

Mr Paterson: I am suggesting that we could add clauses to the Bill, but you are right

that we are getting to the end of March and time is running out. We do not have very

long to consult and get new clauses into the Bill for July. What I would suggest will

probably happen is that, whatever the legal solution is, if that came into legislation

came into Parliament in July, that would not have Royal Assent until spring next year.

Almost certainly, whatever we do, we would have to run on with the statement of

principles as a temporary measure..25

On 16 May 2013 the insurers announced an extension to their voluntary scheme for a further

month beyond the deadline of 30 June 2013 “to give adequate time to address the remaining

issues”.26

4 Agreement at last

Agreement on a way forward was announced as part of the statement on infrastructure

spending. At its heart the deal includes

a commitment by the industry to offer insurance in high risk areas at affordable prices;

the establishment of the Flood Re scheme run by the industry;

a guarantee that the government would be primarily responsible for losses due to ‘a

catastrophic event’ that Flood Re could not meet; and

increased government spending on flood defences.

On 27 June 2013 as part of his speech about infrastructure investment, the Financial

Secretary said:

Too many Members of this House, on both sides, have in recent years seen the

devastation that flooding can cause in their constituencies. We need to work with the

private sector to protect families from the threat of flooding, so we will provide £370

million in 2015 and increase that in real terms every year to 2020. More than 400,000

households will be protected over this decade. Insurance also has a vital role to play in

helping households deal with the consequences when flooding does occur. I am

pleased to tell the House that we have now reached an initial agreement with the

Association of British Insurers on the future of flood insurance. The industry wants to

do the right thing and so do we. We have always said that we wanted to find a solution

25 Ibid Q371 26 ABI letter to Owen Patterson, 16 May 2013.

11

that works for households at risk of flooding, wider bill payers and the taxpayer. The

industry’s proposed scheme, known as Flood Re, promises to do that by effectively

limiting insurance prices for high-risk households. Up to 500,000 households would be

helped, with support targeted towards those on lower incomes. Support would be

funded by a levy on insurers, something the ABI has promised us will not increase

customer bills in general. Importantly, there will be no cost to taxpayers.

There remain many details to work through, so we propose also to take powers to

allow us to regulate for affordable flood insurance should that prove necessary. We are

seeking these powers in the Water Bill, which we are today introducing to Parliament.

The Secretary of State for Environment, Food and Rural Affairs is today launching a

public consultation on our proposed approach, and we welcome views on it. He will

introduce our final proposals to Parliament as a Government amendment in the

autumn.27

More detail on the financial aspects can be found in the accompanying document Investing in

Britain’s Future. It says:

The risk from flooding continues however. To demonstrate the Government’s

commitment to managing this, it has set for the first time a specific long term funding

settlement for flood defences, rising to £370 million in 2015-16 and then protected in

real terms to 2020-21. This provides a total of £2.3 billion and represents a real annual

increase of 18 per cent compared with the Spending Review 2010 period.28

The ABI issued the following statement:

Key elements of the framework are:

Flood Re will be run and financed by insurers as a not-for- profit fund which will cover

the cost of flood claims from high risk homes.

Insurers will pass the flood risk element from those households deemed at high risk of

flooding to the fund. Premiums for the flood risk will be calculated based on council tax

banding up to a maximum limit depending on the Band.

Flood Re would charge member firms an annual charge of £180million.This equates to

a levy of £10.50 on annual household premiums and represents the estimated level of

cross-subsidy that already exists between lower and higher flood risk premiums.

Flood Re will be designed to fully deal with at least 99.5% of years. Even in the worst

half a per cent of years, Flood Re will cover losses up to those expected in a 1 in 200

year – a year six times worse than 2007 – with Government taking primary

responsibility – working with the industry and Flood Re – for distributing any available

resources to Flood Re policyholders should claims exceed that level.

Providing operational issues, including governance and regulatory approval, are

resolved, the aim is for Flood Re to be up and running by summer 2015, with regular

progress reviews taking place to ensure Flood Re can proceed. For now ABI members

will voluntarily continue to meet their commitment to continue to offer flood cover to

existing customers under the previous Flood Insurance Statement of Principles.29

The terms of the deal appears to make it unlikely that government would need to contribute

funds of any magnitude. Properties built after 1 January 2009 remain uncovered. Insurers

27 HC Deb 27 June 2013 c467 28 Investing in Britain’s Future, p8.25 29 ABI website

12

guarantee to continue to offer cover to existing customers where flood risk is not ‘significant’

according to the Environment Agency, or where the Government has announced plans to

reduce flood risk below ’significant’ within five years.

More details on the agreement can be found on the ABI website here. Further negotiations

are needed to decide exactly how some of these arrangements are effected, in particular the

nature of the government’s responsibility in the case of a 1:200 event.

The details of the proposed clauses to be added to the Water Bill, can be found in the

Department’s document Water Bill: commentary on Draft Flood Insurance Clauses. This

follows publication of a consultation document in June 2013. Consultation on the draft

clauses ended on 20 September 2013. Modified draft clauses were included at the

committee stage of the Water Bill (Bill 146 2013/14) and a brief commentary can be found in

the Library Research Paper on the committee stage.

The introductory section of the commentary on draft clauses states that:

The proposed draft of Part 4 of the Water Bill consists of fourteen clauses in total.

Clauses one to four relate only to the FR [Flood reinsurance] Scheme, clauses five to

ten relate only to the Flood Insurance Obligation, and clauses eleven to fourteen relate

to both the FR Scheme and the Flood Insurance Obligation. The territorial extent of the

clauses is UK-wide.30

5 How can flood-related insurance premiums currently be reduced?

5.1 Property-level measures

Property owners can directly reduce the implications of flooding by adopting two types of

property-level measures:

Resistance measures that keep water out of properties, such as air brick covers

Resilience measures that reduce the damage caused when water enters a property,

such as water-proof wall plaster

More information about these measures can be found here and here. Insurers might be

willing to reduce premiums once such measures are in place, although homeowners should

liaise with their insurer as there is no guarantee that they will do so.31 The Environment

Agency recommended:

Preparing your property for flooding will limit the distress and damage caused by it,

which means less costly repairs AND less time out of your home or business premises.

The cost of purchasing and installing products to keep floodwater out of your property

will depend on the size of your property and the type of flood you want to protect

against.

For example, according to the Association of British Insurers (ABI), to protect your

property against shallow flash floods could cost between £2,000 - £6,000. To keep

water out during periods of prolonged flooding will take bigger changes and could cost

between £20,000 - £40,000.

30 DEFRA, Water Bill: commentary on Draft Flood Insurance Clauses, p6 31 Flood risk and insurance: A roadmap to 2013 and beyond: Final report of the flood insurance working groups,

Defra, December 2011

13

Therefore, if there is a high risk of flooding to your property, you may want to consider

one of the following:

Property level flood protection funding - We have made funding available to some

local authorities and local Environment Agency teams to undertake flood surveys of

properties in high risk areas, where the provision and installation of household

flood protection measures may also be funded. More information about the

scheme can be found on our Property level flood protection funding webpage.

Contact your landlord if you’re a tenant, to discuss flood protection options and

your willingness to put in place and maintain any barriers.

If your home or business has been flooded or you’re doing renovations, repair it so

that it’s more resistant to flood damage. Speak to your insurance company about

repairs that will reduce the damage from future flooding, and possibly reduce

excess charges or premiums too.

Check with your mortgage provider to see whether your mortgage can be extended

to cover the cost of making your property more flood-proof (provided you have

sufficient equity in your property).32

5.2 Flood defences

New flood defences can also reduce flood risk and therefore insurance premiums. The new

funding arrangements for flood defences mean that local communities can contribute to flood

defence works that might not otherwise go ahead. See the standard note on flood defence

for more information.

However, it is recognised that improved flood risk is not always taken into account by

insurers. This can be because of a lack of detailed local information on risk.33 The

Environment Agency and Association of British Insurers (ABI) stated that supplying insurers

with more information could lead to reductions in premiums:

You should speak to your local Environment Agency office to see if they have any

more detailed information that may be able to qualify the National Flood Risk

Assessment – for example maximum anticipated flood water levels which can be

compared to the actual floor height of your property.

You may be able to supply your insurer with information specific to your property that

shows that the flood risk to your property is less than that applying to the area where it

is located for example

• You may have better topographical information to demonstrate that your property

is higher than maximum anticipated flood levels

• You may be able to demonstrate that all occupied areas of the house are situated

above these known levels

• You can show that your community or you have taken individual action to stop

flood water getting into your property or to reduce the damage if it does get in.

32 Coping with the cost, Environment Agency, viewed 18 January 2012 33 Flood risk and insurance: A roadmap to 2013 and beyond: Final report of the flood insurance working groups,

Defra, December 2011

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• You can consider asking an independent professional (for example members of

an appropriate chartered institution such as the Chartered Institution of Civil

Engineers, Royal Institution of Chartered Surveyors, Chartered Institution of Water

and Environmental Management or the Association of Building Engineers), who is

experienced in assessing flood risk for individual properties, to assess the flood risk

specific to your property.

The Environment Agency is the lead authority in flood mapping and risk assessment,

but has no role in determining insurance cover or setting premiums – that is a matter

for insurers. However the Environment Agency will take account of evidence from

others on flood risk when updating their maps, so please share any information

provided to your insurer with your local Environment Agency office. Call the

Environment Agency’s 24 hour Floodline on 0845 988 1188 or National Customer

Contact Centre on 08708 506506 (Mon to Fri 8am to 6pm) or e mail

enquiries@environment-agency.gov.uk34

Defra, the Environment Agency and the insurance industry are currently working to improve

the consideration of local flood risk information in insurance.35 See here for more information.

34 Flooding information sheet, Environment Agency and Association of British Insurers, June 2009 35 Flood risk and insurance: A roadmap to 2013 and beyond: Final report of the flood insurance working groups,

Defra, December 2011