Flood insurance

Published Tuesday, February 2, 2016

This note outlines issues relating to flood insurance within the UK and the establishment of the Flood Re scheme by the Water Act and subsequent Regulations.

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The continued general availability of domestic (the commercial market is excluded from this scheme) flood insurance at reasonable cost has been under pressure for some years following an increase in the number and severity of flood events.

The increased incidence of localised flooding present insurers with a dilemma. They could either:

  • carry on as before, and face repeated, huge, claims from a minority of claimants which is unprofitable for them, 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.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 and a new insurance vehicle – Flood Re.
  • The main points are
  • Commercial considerations have weighed heavily on that decision and the availability of insurance in flood risk areas (at any price) has become noticeably restricted as insurers pulled out of the market. Against the backdrop of a temporary agreement expiring in the summer of 2013, industry and government started negotiations on a new arrangement to secure flood insurance remaining widely available. The result of the negotiations is the new Flood Re scheme agreed in 2015.
  • 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.

The primary legislative framework for Flood Re is the Water Act 2014, which received Royal Assent on 14 May 2014. The 2014 Act commenced with effect from 1 January 2015. The Flood Re Regulations put in place the secondary legal framework around the Scheme, its funding and its administration.  The Scheme will go live in April 2016.

A Library Research Paper includes details of the Water Bill.

Flood Re has its own website now. Many questions that Members or constituents might have are covered simply on its FAQ pages.

Commons Briefing papers SN06613

Authors: Tim Edmonds; Oliver Bennett

Topics: Environmental protection, Financial services, Flooding, Water

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