Household flood insurance

This briefing paper is no longer being updated but is available primarily for its detailed account of the background to the development of Flood Re. For up-to-date information, please see Household flood insurance: Flood Re (CBP-8751).

The continued general availability of domestic flood insurance  at reasonable cost had been under pressure for some years following an increase in the number and severity of flood events.

The increased incidence of localised flooding presented 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.

Commercial considerations weighed heavily on that choice. The availability of insurance in flood risk areas (at any price) became noticeably restricted as insurers pulled out of the market.

Mindful of the social consequences of a market failure, government sought, with the industry, a long-term solution which encompasses a reduction in the totality of risks (better flood defences) whilst maintaining, to a degree, the traditional pooling of risks pricing model and the minimum of market interference.

Formal moves to find a solution began with a Flood Summit in September 2010.This discussed what would happen to flood insurance after 2013. Three working groups were set up to take forward a work programme. The groups comprised representatives from government, the Environment Agency, the insurance industry and related organisations. These efforts were against the backdrop of a temporary industry-government agreement expiring in the summer of 2013.

What emerged was a pact that would be governed by an agreed statement of principles and a new insurance vehicle – Flood Re.  The main points of the pact are

• 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 including its funding and administration.  Flood Re went live in April 2016.

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