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Lifeline for homes

There is still no sign of government and insurers agreeing on a mechanism for insuring properties at high risk of flooding once current arrangements come to an end later this year. So what are they arguing about? Margo Cole explains.

Every major flood event in the UK raises the thorny issue of who should pay for insurance cover for people whose homes and businesses are most at risk. Last year’s floods brought this issue into particularly sharp focus, as a temporary agreement between insurers and the government that guarantees flood cover is set to run out soon. There is now a genuine risk that some households and businesses will be unable to get insurance.

“We understand the concerns from the government about this sort of system, but this is a big and increasing risk for the UK”

Aidan Kerr, Association of British Insurers

The Statement of Principles, as the agreement is known, was signed in 2006 and comes to an end in June this year. Both parties are keen to see the end of it, and have been in discussions for nearly two years to find an alternative. But with just six months to go they still can’t agree.

Just before Christmas, prime minister David Cameron got involved, saying he would take a “tough approach” to the negotiations, and drafting in Cabinet Office minister Oliver Letwin to spearhead the talks. Although Letwin is believed to have had at least one meeting with the Association of British Insurers (ABI), which is representing the insurance industry, there is still no resolution.

The sticking point is ideological: the government does not want an agreement that could involve public money being spent to bail out flooded householders, while insurers claim flooding is a societal issue, and will only increase with climate change. As such, they believe it should not be left to the free market to shoulder all of the burden.

“There is no country that has a functioning free market that delivers affordable flood insurance for those at high risk,” says ABI head of property and Aidan Kerr.

Last year the ABI offered a solution, known as “Flood Re”, which it claims to have spent two years and £500,000 developing. Under the scheme, a not for profit organisation (Flood Re) would provide insurance at a capped price to householders who are unable to get cover on the open market. High risk householders would pay their premiums into Flood Re, and any claims they made would be paid out from the money collected in Flood Re.

“If an insurer offers something at a lower premium than the cap, then they should go for the free market,” explains Kerr.

“But if they can’t get it any other way, they could get it through Flood Re.”

Effectively, this would mean that properties insured through Flood Re would be “under priced” - ie the premium being paid by the householder would not reflect the risk - so the pool would need to be topped up by a levy on the industry. According to Kerr, this would add around £8 to every household insurance policy - which is similar to what is being paid now under the Statement of Principles arrangement.

“Over a long period of time we would have enough money in the pool to pay the premiums,” he explains. “But flood risk is volatile, so the risk is that if we had a 2007-type flood in the first one or two years there would not be enough money to deal with that.”

This is where the industry is asking for government help, to step in with cash if there is a large flood event before the Flood Re pool is big enough to cover the cost of claims. According to Kerr, it would be paid back once the funds in the pool build up again.

“We understand the concerns from the government about this sort of system,” he says, “but this is a big and increasing risk for the UK, so we need to have something that addresses this.”

So far, the government is maintaining its stance that Flood Re is not a viable option, reiterating the fact that it thinks the best use of public money is to build flood defences that will protect more at risk homes.

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