SPECIAL FEATURE: Flood Re effects on home insurance
The wettest winter on record has taken its toll on the insurance industry. With claims set to exceed £1bn, 2013/2014 represents a new low for the stereotypically poor British weather.
As 1,500 families remain exiled from their homes, the impact on communities has been enormous, and insurers must continue to provide as much support to those in need as possible.
The appalling weather conditions have not only been a British phenomenon. Germany has also been affected particularly badly, with flooding in July estimated to cost European insurers around €1.3bn. Headlines were also grabbed throughout north-western Europe by the ‘St Jude’ storm on 27-28th October, which battered the mainland, causing yet more damage.
Whilst Britain was fortunate to emerge without bearing the brunt, the insurance bill for that storm was still estimated to be around £130m.
Britain’s infrastructure was wholly unprepared for the flooding experienced in February, which contributed to the enormous bill.
The scale of the flooding also came as a shock to insurers, particularly following a relatively calm 2013, with low levels of household insurance claims. This year saw the industry inundated with over 18,000 claims in February alone.
Despite the ever-rising costs, both the government and insurance industry are in agreement that residential property owners (in the most part) living in flood risk zones should not be punished with unaffordable insurance premiums for events beyond their control.
With the 2000 Flood Insurance Statement of Principles considered to be unsustainable, a new approach was required to safeguard affordable and widely available flood insurance in the UK. As a result, the Flood Re scheme was devised during the summer of 2013.
The industry has continued in the meantime to demonstrate its goodwill towards those at risk of flooding, honouring the Statement of Principles despite its expiration in July 2013. Insurers have also agreed to maintain this until the introduction of Flood Re, scheduled to be in place from the summer of 2015.
Designed to be a not-for-profit reinsurance scheme, Flood Re will allow insurers to transfer the premium they receive for the flood risk part of home insurance policies to Flood Re. In return, Flood Re will reimburse insurers for flood claims paid by insurers to customers.
Aiming to provide a long term solution, the insurance industry is committed to getting this scheme off the ground. An additional levy on all home insurance customers, estimated to be an average of £10.50 per house, will make up the difference.
So how will this new scheme aid those most in need? Covering up to 500,000 households designated as high risk of flooding by the Environment Agency, the scheme promises to cap the flood aspect of a property’s buildings insurance.
Bands A and B will pay a maximum of £210 a year, rising to £540 a year for band G, ensuring that those most at risk financially from further natural disasters avoid the additional penalty of increased premiums.
However, the scheme has not been universally welcomed, with critics suggesting that there have been some significant exclusions.
New-builds since 1 January 2009 are exempt, as are leaseholders, renters and buy-to-let landlords. After further controversy and press coverage surrounding the exclusion of the most expensive ‘at risk’ properties, the government has recently announced a rethink on the 3,800 houses currently in council tax bracket H.
Critics also point to a range of more complex issues that will affect consumers. Such areas of confusion include the eventuality that flooding occurs between exchange of contract.
If a buyer attempted to pull out of a deal for a flooded property, they would lose their deposit and would also incur other costs from the seller.
What can brokers do to help? To begin with, brokers will need to be aware of the changes to the flood aspect of home cover, and fully understand what it is they are able to offer to customers. Flood Re offers a significant opportunity for brokers to educate the consumer on the new regulations, and explain where they would fit into the new spectrum.
With the enormous amount of press coverage on February’s floods, there will be many that are interested in the cover available to them and brokers must be able to offer them appropriate and comprehensive advice.
Flood Re will offer some of Britain’s most at risk homeowners peace of mind, and with the industry’s backing, it seems set to be a topical item for many years to come.