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Sharing the Flood Risks

Agreement is in sight between the government and insurers on flood insurance. Bill Gloyn looks at the implications:

The continued availability of flood insurance for most high-risk properties has been guaranteed over many years by a deal, latterly called the Statement of Principles (SoP). The agreement was dependent on an acceptable level of public investment in flood defences. The latest version of the SoP, dating from 2008, expired in July after a month’s extension to allow negotiations between the insurers, represented by the Association of British Insurers (ABI) and the government to finalise an alternative scheme.

The announcement of a solution that guaranteed available and affordable cover in future was heralded with more than a sigh of relief, especially by those in high-risk areas who otherwise faced the prospect of uninsurable and unsellable properties. The sigh was limited to residential owners, however, because commercial property is excluded, as are new properties built after 2009 and small- and medium-sized enterprises. For those owners the response was more of a groan, as it was for owners of residential property in council tax band H, also now excluded from the proposed deal.

Of the four options, consultation on which closed on 8 August, the stated preferred choice was for a Flood Re arrangement. This
would involve insurers transferring flood risk to a pool in exchange for a levy on all household policies, and a set premium for high-risk buildings and contents insurance based on council tax bands.

If the fine details of this scheme cannot be agreed between them, the government has also proposed the alternative that every insurer wanting to underwrite household insurance had to accept a target number of high-risk properties. If they fail to achieve that target, sanctions would be imposed – possibly to the extent of removing their ability to write that class of business.

One of the issues remaining is securing EU agreement for the adopted scheme – not a foregone conclusion because it amounts to government intervention in trade. Also not yet clear is how a ‘one-in-200 year’ event – unlikely but possible – will be dealt with, because it falls outside the proposed Flood Re proposal. The government is unwilling to take up the slack for that officially – although it may have no alternative in reality.

In the meantime, although SoP arrangements continue until the new system comes into force in 2015, it will not be surprising if more properties are uninsured and values reduce accordingly. The RICS did not submit a response to the consultation but was
waiting to see whether its concerns have been heeded.

By Bill Gloyn  for RICS

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