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Flood Re: Sunk before launch?

December 29, 2015

The relentless heavy rainfall across the north of England is calling into question our entire approach to water management, flood risk, flood defences and flood insurance. The last few weeks have changed the game so dramatically that you have to question whether Flood Re – the joint insurance industry and government initiative to provide cover to the most flood prone domestic properties – is already doomed.

Flood rescueIf Flood Re had already been up and running as was originally intended it would be financially stretched, possibly relying on government support and almost certainly having an industry whip-round in the form of a second levy bail it out. The insurance claims from the current flooding are already estimated to be a minimum of £1.5bn, although part of that will be from commercial properties which Flood Re won’t cover, contrary to what the BBC and other national media outlets were suggesting this morning. Even so, we have to assume that many, if not most, of the domestic properties affected are in high risk flood areas and would therefore have been passed by the mainstream insurance industry to Flood Re. Without years to build up reserves from the levy that will be imposed on all household property insurance policies Flood Re would be pushed to pay the claims that would now be coming its way and would be close to going through its reinsurance cover, expected to be set at £2.1bn. With no levies squirreled away in reserves it would have to look elsewhere to find the money to respond to a disaster on this scale. That could be the trigger for an additional levy on all insurers ceding policies to Flood Re.

That was before everyone started to acknowledge that the severity of the current flooding will prompt a complete reassessment of flood risk. It will mean many more homes being added to the hundreds of thousands of the most vulnerable high risk properties that Flood Re will be expected to cover. The length of time it is taking to get the current modest project up and running suggests that to ask it to cope with a much expanded portfolio will be expecting too much.

Businesses face insurance crisis

Then, there will be the increasing pressure on the insurance industry to ensure that small businesses in flood prone areas can find affordable insurance. The claims that the market is providing this at the moment are not supported by the stories coming out of the north of England. Many small business are saying they are uninsured, or subject to huge excesses that effectively render insurance useless. This was always a weakness of the Flood Re scheme. It was clear from the start that it should have been extended to cover small businesses. The pressure on the government and insurance industry to ensure small firms can find affordable and effective insurance cover will now intensify. Flood Re is not set up to provide the answer and to look to it now to take on commercial properties would set it back months.

It is hard to have much confidence in Flood Re as a solution to the huge challenge of providing flood insurance to domestic and commercial property owners in this dramatically changed world. It was always a limited solution to a very restricted view of the problem and many will judge it harshly when it proves not to hold the magic wand flood victims hope for.

One Comment
  1. Huge excesses do not necessarily render insurance useless. Excess buyback facilities such as http://www.floodexcess.com exist which are available to both private and commercial clients. Flood Excess is available for Brokers to offer their clients a buyback policy for excesses up to £50,000.

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