Understanding Flood Insurance: United Kingdom

This article is a part of a series on flood insurance options. Read the intro and meet Mr. Watersedge here.

In the United Kingdom, Flood Re was developed in 2013 as a not-for-profit company. Flood Re was agreed between UK flood insurers and the Government, with full implementation in April 2016. The Flood Re approach allows insurers to pass the flood risk part of a home insurance policy into a fund that will pay for subsequent flood claims[1]

How does the United Kingdom’s Flood Re work? 

Flood Re only covers flood risk. In order to pay for claims after flood damage occurs, there is a central fund comprised of two elements; premiums passed on by insurers and an annual levy.  

Premiums charged to insurers are based on a council band system. Flood Re caps the insurance of home owners in in flood-prone areas to £210 pounds per year for homes in “Band A and B”, rising to £1,200 pounds per year for homes in “Band H”, for more expensive properties. The policy covers 500,000 properties at risk of flooding so, depending on where you live in the floodplain, you can be eligible for a specified amount of insurance coverage[2]. For Mr. Watersedge who lives in the “Band E” area, he is eligible for a cap of £330 per year.

 

Flood Re: Council Band Tax System[3] 

Council Tax Band

A,B

C

D

E

F

G

H

Buildings policy

£132

£148

£168

£199

£260

£334

£800

Contents policy

£78

£98

£108

£131

£148

£206

£400

Combined policy

£210

£246

£276

£330

£408

£540

£1200

 

An annual levy is also be paid by all insurers that are authorized to write home insurance policies in the UK. This levy is set at £180 million pounds per year for the first five years and will be charged based on each insurer’s market share[4].  Overall, homebuyers can purchase home insurance like before; however, the number of affordable home insurance options increase for homes susceptible to flooding. In Mr. Watersedge’s case, because he owns a home on the edge of the Flash River, this makes his home susceptible to flooding and increases the affordability of his flood insurance options. 

 

What are some short-comings in the Flood Re approach? 

Flood Re is a new scheme in April 2016. There have been some initial concerns raised:

  • Subsidised flood insurance will be available to homeowners that fall into “Band H”, the UK’s most costly homes.  Originally this group was not included because it was assumed they were wealthy enough to cover the insurance costs, however some homeowners expressed this is not the case. As a result an additional 3,800 homes at risk of flooding fall into “Band H”.
  • Thousands of modest properties, such as leasehold flats and rented homes are exempt from this policy. Commercial property is also exempt from Flood Re coverage.  

 

While this option is affordable for susceptible homeowners, the United Kingdom policy may not be the best option for Mr. Watersedge because it does not cover rental properties. As a result, he would be responsible for covering the costs of damage and replacement for the rented basement and contents. Nonetheless, because Mr. Watersedge lives on the main floor of his home damage to this part of his property and contents would be covered. Therefore, Mr. Watersedge could receive some coverage while paying for his damaged basement.  

 

What are the opportunities in using the Flood Re approach?

The Flood Re program is designed to enable high flood risk households to obtain affordably priced flood insurance. Prior to Flood Re the Flood Insurance Statement of Principles Policy was in operation for 16 years. With increasing flood risks Flood Re offers an estimated 300,000 to 500,000 additional homes affordably priced flood insurance. Flood Re proves to be an innovate approach to flood insurance where government and industry have joined to create a non-governmental organization that accommodates flood insurance options and insurance providers. Once the program is fully implemented in 2016, Flood Re could provide a helpful model for Canada to consider when addressing flood insurance.  

 

Sources:

  [1] “The Future of Flood Insurance: what happens next?” Association of British Insurers. https://www.abi.org.uk/Insurance-and-savings/Topics-and-issues/Flooding/Government-and-insurance-industry-flood-agreement/The-future-of-flood-insurance 

  [2] Christie, Sophie. “Flood Re: Government insurance scheme launch confirmed for 2016.” The Telegraph. http://www.telegraph.co.uk/finance/personalfinance/insurance/buildingsandcontent/11659907/Flood-Re-Government-insurance-scheme-launch-confirmed-for-2016.html 

  [3] “Funding.” Flood Re Website. http://www.floodre.co.uk/how-it-works-funding

  [4] Ibid.