New Flood Insurance Measures
Regulations to establish a flood reinsurance scheme (Flood Re) were made in November and came into immediate effect. Flood Re is the system preferred by The Association of British Insurers and the Government to ensure that affordable insurance against flood risk is available for home owners whose properties are considered to be at high risk of flooding. It is anticipated that the scheme will start business in April this year and the catastrophic floods which we saw over the Christmas period demonstrate that a workable scheme needs to be implemented as soon as possible.
Why is a reinsurance scheme needed? There is now much more data available about the different types of flood risks. It is estimated that one in six homes are at risk of flooding and over half of those are at risk of surface water flooding. Insurers buy the data and use it to assess the risk of different types of flooding in different areas. They then factor that data into the pricing of their insurance cover. Properties (commercial and residential) in areas with a greater risk of flooding will face higher premiums, higher excesses and possibly requirements to carry out alleviation measures in order to maintain cover.
How will it work? Flood Re is a reinsurance fund, owned and managed by the insurance industry and allows insurers themselves to insure against large scale losses with other insurers. Insurers sell policies to their customers in the usual way but may pass the risk carried by those policies to Flood Re. Those risks are then pulled into a fund which pays out to the insurer if claims are made. The responsibility for paying out to customers if a claim is made stays with the insurer but they have a fund which they can claim against if claims are made.Insurers can then take on more risk because the consequences of large claims are more widely spread.This will encourage insurers to compete for flood risk business and should result in more choice and lower premiums for property owners.
The scheme will cover the cost of flood damage to properties in return for a premium paid to it by insurers. Flood Re will charge insurers a fixed premium based on the council tax band of the relevant property and the insurer will be charged a fixed excess of £250 per policy. However, to cover the shortfall between the cost of flood damage and the lower premiums and excesses, insurers will play Flood Re a levy and insurers will decide how best to pass on the levy. The scheme will only operate for 25 years to allow the Government, local authorities, insurers and the public to become better prepared for flooding.
Will I be covered? Flood Re reinsurance is not available for many types of property. Properties which are not covered by Flood Re are:
- All commercial property
- All mixed use property
- All purpose-built blocks of flats
- Most houses that have been converted into flats
- All residential property built since 1 January 2009
These properties will be subject to commercial premiums and excesses for flood cover.Prospective buyers or tenants of property should therefore ascertain whether the relevant property is at risk of flooding and whether it will fall within the scope of Flood Re. If not, they may want to check what insurance cover is available, upon what terms and at what premium.
Why does it matter? Properties within high risk areas may find that their values decline. The significant disruption and cost to businesses and homeowners associated with flood damage (even if insured) may make potential buyers think twice about buying a high risk property thereby depressing its value. Development sites may be more difficult to exploit or may require expensive protection measures which could result in lower valuations of those sites to compensate for those costs.
What can I do? Knowledge is king. Commercial searches are available which cover many different types of flood risk and analyse whether particular properties are at low, medium or high risk of flooding. The cost of a detailed flood search is typically between £20 – £30 for a residential property and £75 – £150 for a commercial property. In the overall context of the acquisition costs of a property, that would be money well spent. If a potential buyer discovers that the target property is in a high flood risk area, the search information should be passed to the buyer’s valuer who should be asked to assess any impact on value. And with Flood Re having a 25 year lifespan there is an incentive for property owners to identify possible alleviation measures and implement those to ensure that affordable, property specific cover is available in the future.
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Please note the contents of this blog are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.