Recent flooding across England has highlighted the problem of ensuring adequate insurance cover for people living in areas at risk. The insurance industry calculates premiums based on risk, so how can it ensure that people affected can get affordable household cover? And how far is that a matter for the industry and its customers alone?

Many people couldn’t afford flood insurance

Getting affordable household insurance in flood-risk areas has become an acute issue over the last two decades. Insurers have received more and costlier claims due to flooding, and customers have seen increasing insurance premiums and excesses. But with about one in ten homes in the UK located in floodplains – and whole areas gradually being excluded from affordable cover – access to flood insurance became a difficult social and political issue.

As a result, the insurance industry and the then Labour Government agreed various statements of principles. The industry committed to provide flood insurance for domestic properties and small businesses “for as many customers as possible.” Crucially, this promise was directly linked to government commitments to invest more in flood defences.

But the devastating 2007 floods put the viability of this arrangement under serious strain. The floods killed 13 people and caused over £3 billion in damage.

The introduction of Flood Re

Further discussion between successive governments and the insurance industry led to a new system that has just seen its first major test – Flood Re. As in the past, this system is led by the market but is even more explicitly linked to flood resistance and resilience policies. It was established through the Water Act 2014 and came into use in 2016.

Flood Re is a re-insurance scheme (hence the ‘Re’) in which insurers can pool the costs associated with higher-risk properties by paying a levy into a non-profit-making fund. All domestic policyholders help to subsidise the scheme at a cost of about £10.50 each annually. It’s important to note that householders don’t deal with Flood Re directly. Decisions about whether eligible properties are included in the scheme are made by insurers.

Flood Re has been able to boast some notable successes. Almost 250,000 households have benefited and four out of five properties that previously submitted claims for flood damage have seen prices fall by 50%. The Telegraph reported that for one Surrey householder, for instance, quotes fell from a £3,000 annual premium and a £30,000 excess to as little as £425 “with much lower excesses.”

Who isn’t covered by Flood Re?

Although Flood Re appears to have succeeded in its initial aim of stabilising the domestic market, some problems remain in wider provision. Most importantly, commercial properties are excluded. And not all domestic properties are covered; there are sometimes complex arrangements for leasehold flats and properties in mixed use. Furthermore, in recognition of its link with wider environmental policy, the scheme generally excludes properties built since 2009. The idea is to discourage further development in areas at risk of flooding.

The exclusions are set out in detail on the Flood Re website and ultimately eligibility should be apparent in quoted premiums and excesses. The Association of British Insurers insist that any limits to cover should also be clearly stated to customers so they know what they’re signing up for. Perhaps inevitably though, some householders claim that they weren’t aware that they wouldn’t be covered in the event of a flood.

A review of Flood Re

The recent floods have been the first real test of the system and it’s likely that the coming weeks and months will see close scrutiny of how effective Flood Re has been in practice. The Environment Secretary, Theresa Villiers, has announced a review into how far “those affected by flooding did not have sufficient insurance cover.”

We don’t yet know which aspects the review will cover, but there are some clear limitations to the Flood Re approach. The exclusions are sometimes difficult to understand and even if the industry has supported brokerage schemes, the apparent differential treatment won’t sit easily with those who’ve recently suffered losses.

Flood insurance in the future

Flood Re is due to end in 2039, at which point the intention is to return to a market-based system that reflects risk. That assumes progress on flood defence and resilience measures in the intervening years. Flood Re’s strategy is that premiums and payments should encourage householders to make their properties more flood resilient. This is all the more important in the context of climate change, which is likely to lead to more flooding.

There are concerns reducing the effects of risk-based approaches on premiums might promote ‘moral hazard’. This is when householders pay less attention to reducing risk because their insurance covers them against it. It also raises questions over how far customers who are not at risk should subsidise those who are.

Further reading

Household flood insurance: Flood Re, House of Commons Library.

About the author: Steve Browning is a researcher at the House of Commons Library, specialising in insurance.