Flood Re unworkable says industry
Update : 24th July 2014
by Morag Keohane Dip CII
It now seems that the Flood Re fund, the scheme designed to ensure properties would not be denied flood insurance is in doubt because government proposals are unworkable, according to the insurance industry.
The draft regulations contain several worries according to insurers, which they say have to be addressed.
The Association of British insurers say the matter is even worse because in their view the proposals might not get regulatory approval as "a sustainable insurance vehicle". A limit to Flood Re cash flows, in the industry's opinion, are creating impossible problems.
Unless a resolution can be found to the problems, it is estimated that approximately 200,000 homes will suffer massive premium and excess level rises.
According to the industry, the lack of investment in UK flood defences has led to an undermining of their commitment to provide universal flood cover.
It looks likely now that the launch of Flood re-will be postponed beyond its proposed introduction in summer 2015.
It seems that the main problem is Defra's proposal to prohibit Flood re-from adding over £100m in any financial year to public sector borrowing.
Although policyholders will fund Flood Re, the public sector will nonetheless have to underpin the new arrangements. In practice, it may be necessary to make pay-outs exceeding £100m, but the Department wording prevents this.
It has been suggested that the document was prepared in haste and to fit the legislative timetable, although the government intimates that adequate reinsurance could fill the funding gap.
There will now be a further delay of at least eight weeks while Defra consult further.
Meanwhile, a proposed 'three strikes' policy, designed to encourage owner investment against flooding, could exclude them from the scheme altogether once they have made their third claim and if adequate precautions had not been taken.
Brokers understand from Tom Woolgrove, the interim Flood Re CEO, who has been in discussions with Defra, that the government's aim was to achieve investment by owners to protect property against flooding, and the '3 strikes' would be an incentive to do so.
He said that Flood Re was "...working with them to make sure that this is proportionate but creates some incentive for policyholders to take action. There has to be some limit on the number of flood claims that Flood Re can reimburse before a policyholder takes some element of responsibility towards resilience measures."
He implied that once the first claim had been made, Flood Re would encourage 'and probably pay for' a flood resilience survey.
Once a second claim had been made, the policyholder would be directed to invest in measures up to a financial limit. If this has not been followed through when a third claim was made "essentially that policy will be unable to be ceded into Flood Re".
His said brokers could assist policyholders with advice on how best to protect their properties.
Update : 15th July 2014
by David Gurton
A report by the British Insurance Brokers' Association (BIBA) concerning the effect on some flood-prone properties excluded from Flood Re, is considered so sensitive that it has not been made public.
The report warns that policyholders will be liable to severe increases in both premiums and excess levels on renewal. It identifies examples of small brokers facing problems when sourcing and renewing property insurance for customers whose homes and businesses are in danger of flooding, and are excluded from Flood Re.
The document shows extreme examples of premiums rising from £2,000 to £25,000, policy excess hikes from hundreds to tens of thousands of pounds and in some cases, total exclusion from cover.
Ian Fletcher, director of policy at the British Property Federation, has said excluded properties should be incorporated into the scheme as a matter of urgency.
While we knew SMEs would be excluded from Flood Re, this is the first we have heard of large increases in premiums and policy excess. The report also warns that if small businesses can't secure affordable flood insurance they would risk closure.
Until now, the insurance industry has insisted that there would be no problem with SMEs obtaining cover, though they acknowledged it might be difficult for some homeowners.
As highlighted in last month's blog update, Dan Rogerson, the floods minister, representatives from the Department of Environment, Food and Rural Affairs (Defra), insurance companies and other interested bodies were due to meet at the end of June to discussed flood insurance availability.
Following the meeting, Defra said that insurance companies had reassured them there were no issues with SMEs and leaseholders accessing flood insurance on a competitive basis. However, Defra confirmed they would review the new report alongside their own, which is due to be published at the end of the year.
17th June 2014
by Morag Keohane Dip CII
According to Insurance Times, 'Flood minister Dan Rogerson is to discuss commercial flood insurance with BIBA (The British Insurance Brokers' Association) later this month.'
In an effort to establish whether those excluded from Flood Re (small businesses, houses built after 2009 etc) will find affordable cover, the Department for Environment, Food and Rural Affairs (Defra) has now embark on its own research.
This new evidence gathering is in addition to a survey, prompted by a request from government ministers and undertaken by BIBA with its member brokers, to see if their 'exccluded' clients were facing problems. The results of the survey, Mr Rogerson said, Defra had considered 'with interest'.
Defra will study both pieces of evidence.
Undoubtedly there is more to come on this saga – the planned 'round table' meeting is in the diary so watch this space.
Update : 20th March 2014
by David Gurton
Recent lobbying by interested parties against perceived injustices in the new Flood Re scheme seems to be paying off.
Currently going through Parliament, the Water Bill has been the subject of further amendments, even before it reaches the House of Lords let alone any ink is drying on the paperwork.
The Department for Environment, Food and Rural Affairs (Defra), have announced that at-risk owner-occupied residential leasehold 'blocks' made up of three properties or less, will now be included in the scheme and covered by Flood Re when in comes into force in the summer of 2015.
These smaller blocks are likely to be flats converted from a single home. However, there is a caveat, cover will only be provided if the owner of the freehold is among the residents of the block.
This latest amendment extends the number and range of homes now included in Flood Re but there are many who feel penalised still. This story is likely to run and run as we are drip fed changes.
Let's hope that the recently re-named Ebbsfleet Garden City development, which long ago received planning consent, has a robust flood defence scheme in place!
Flood Re causes controversy
by Morag Keohane Dip CII
Flood Re is causing controversy for some who may be adversely affected in the property sector. Following the aftermath of the 2007 flooding, government called for the insurance industry to put its house in order with regard to future flooding cover.
The scheme - part of the Water Bill - was subsequently thrashed out and is currently going through the Houses of Parliament. It will launch in the summer of 2015. Under current arrangements households and small businesses are guaranteed flood insurance. But this will no longer be the case under the new Flood Re Proposals.
In return for government investment in flood defences, insurers have agreed to provide affordable insurance to properties that are at high-risk of flooding as well as a promised flood insurance cap on premiums.
In outline, the scheme is a not for profit fund to be financed and administered by insurers, which will deal with claims from homeowners in high-risk areas. The flood risk part of the policy will pass to the fund and premiums will be based upon council tax banding.
In order to help insurers fund the scheme, a levy1 – currently proposed at £10.50 per household - will be applied to home insurance policies throughout the UK.
Unfortunately, not all properties will be covered by this scheme and many face the daunting prospect of being exempt from capping and possibly unable to obtain affordable insurance.
At risk properties excluded from the scheme comprise:
• All properties in council tax Band H**
• Buy to let properties
• Leaseholder properties where insurance is purchased by managing agents
• Holiday lets
• Commercial properties
• Properties built after 2009*
Property owners who fall into an excluded category are likely to face an increase in both their premiums and excess.
At risk homes in council tax Band H** may be difficult to insure, and as mortgage lenders will not provide funding for properties without buildings insurance this may affect values.
Whilst tenants may continue to insure their contents, landlords may find insurance policy premiums unaffordable if the property is ever flooded. Landlord insurance should assist towards the cost of rehousing but if the price becomes prohibitive it may result in a withdrawal from the sector in these risk areas.
The National Landlords Association (NLA) head of policy, Chris Norris, recently commented that in the worst case scenario, it makes these rental properties worthless, or certainly worth much less than they should be.
I agree! I believe that all residential properties should be included in Flood Re. Parts of Kent have been badly affected by the most recent flooding with villages such as Bridge, Patrixbourne and Yalding facing months of disruption before flood victims can get their lives back on track.
It seems grossly unfair to penalise some who may not have been flooded before but these extreme circumstances have resulted in some extreme consequences.
Caxtons will continue to support our landlord and tenant clients, endeavouring to find them the very best cover and premiums for their properties.
We act for many residential block management companies and landlords of leasehold residential property, and leaseholders in those properties will feel the knock-on effect of increased premiums as their insurance is purchased by a commercial enterprise - their managing agents – and are excluded from Flood Re.
Small businesses in flood risk areas will also see premiums soar as they too fall outside the proposed scheme.
I feel strongly that holes in the Flood Re scheme should be addressed before it comes into force next year.
Whether their properties are commercial or residential, property owners who live in high risk areas should not feel penalised or abandoned. Those affected are lobbying government and the insurance industry and, following the last few months of intense rain, changes to the scheme may yet be on the cards.
A major sticking point to potential amendments may be the government's belief that it would be unfair for smaller homeowners to subsidise the largest private homes, property freeholders and small businesses – including buy-to-let.
*New homes built after 2009 are excluded from the Flood Re proposal, on the basis that housing built after this date should have been properly assessed for flood risk, (PPS 25 and National Planning Policy Framework). They are already excluded under the Statement of Principles. Water Bill: Written evidence submitted by the National Flood Forum
** Since writing this blog the government has called for Flood Re to be extended, but only to the most expensive homes in council tax Band H. Direct Line chief executive, Paul Geddes, cautioned that the amendment would increase the proposed levy1.