Find out key information on Flood Re, and how working with Ambiental can help you mitigate the challenges, and grasp the opportunities.
What is Flood Re?
Since the turn of the millennium, a gentleman’s agreement, referred to as the Statement of Principles, has existed between the government and insurers across the United Kingdom. The agreement stated that insurers were committed to offering insurance to customers, even in the event of properties being previously flooded or at high risk of future flooding, on the provision that the government will continue to invest in national flood defences.
Having been intended as only a temporary solution, the Statement of Principles expired in July of 2013, and rather than turning flood insurance over to a completely open market, the agreement is set to be replaced by Flood Re.
Flood Re is a not-for-profit company in its own right, set up by the Association of British Insurers, which will act as a reinsurance pool, funding at-risk properties that insurers cede to the ‘pot’. The company itself will be owned and managed by the insurance industry, but will be regulated by the government.
How will it work?
Over the next few years, the reinsurance pool will be built up, as insurers pay a levy, or fee, to the government. By doing so, the insurers gain the option to cede the flood premium for selected properties to Flood Re. In other words, insurance companies will be able to evaluate which properties they feel are too high a risk to insure, and will have the option of giving over the flood component of the insurance risk to Flood Re, rather than retaining that risk for themselves.
The insurance premiums will be based on council tax, ranging from £210-£1,200 depending on council tax band, and will therefore be a predictable, fixed premium that is passed on to the member of the public that has been ceded to Flood Re. High-risk property owners will receive a letter from Flood Re explaining that they have been ceded to the reinsurance pool, and are expected to offer advice on property level mitigation measures that can be taken to reduce this risk. These measures could include installing appropriate flood barrier systems, moving valuable property upstairs and above predicted flood levels, and encouraging property owners to register with flood alert services from the Environment Agency.
What are the benefits and challenges of joining Flood Re?
Being a collective pool of money to reduce the risk to insurers, Flood Re provides a security to both insurers and property owners. Without this reinsurance pool, there is a threat that flood insurance could become an open market, leaving as many as 500,000 high-risk property owners without adequate, or affordable, flood insurance. Without insurance, buyers would find it very difficult to secure mortgages on properties, potentially leading to widespread property blight.
It is expected that within three years of its launch, Flood Re will have built up a portfolio of around 500,000 at-risk properties, and will retain enough capital to cope with a one-in-two-hundred year loss event. This means that there will be sufficient funds within the reinsurance pool to pay out a flood event even bigger than that experienced during 2007, where flooding cost the insurance industry upwards of £3 billion.
There are, however, some exclusions to the Flood Re scheme. Commercial properties are exempt, as are any new builds, that is, properties built after 1st January 2009. Leasehold properties of 4 or more residential units are also excluded from the scheme, and this could mean that property owners see higher premiums brought in for new builds, and buy-to-let investments in at-risk areas, as insurers decide how best to manage the risk.
In addition to this, problems may also arise at the end of the Flood Re scheme. Currently scheduled to run for twenty-five years, property owners who have been ceded to the pool are likely to see an increase in insurance premiums once the scheme comes to an end, and true risk-based pricing takes over.
For many insurers, the Flood Re scheme will not change the way they run; insurers will continue to write business for properties they feel comfortable accepting the risk for, so as to maintain customer loyalty, and will reject those they feel unsure of. In this instance, the scheme will give the benefit of an additional option, allowing insurers to retain their clients but hedge some of the risk.
Others however, chiefly those who write mainly commercial policies, which are excluded from Flood Re, will still be required to contribute, albeit proportionally less to the levy to be part of the scheme.
As a backstop, in situations where post-event flood claims exceed Flood Re’s reserves, Flood Re will have the right to call on additional capital from the insurers (known as Levy II), although this is likely to be a reimbursable contribution.
What can Ambiental do for you and your clients?
Maintaining a dynamic list of around half a million properties that are considered to be at the highest risk of flooding, Ambiental are in a position to give expert advice to clients, helping them to make the most effective decisions around the ceding process.
By calculating what each client can expect to lose to flooding every year on each property (using Average Annual Loss, or AAL analysis), Ambiental can then match this against the premiums being charged. If the loss figure exceeds that which the premium brings in, it can highlight which properties would be beneficial to cede to the Flood Re scheme. By highlighting how insurers can minimise their flood losses, while retaining the majority of their clients, Ambiental is able to help clients be more insightful about their ceding decisions.
On the 8th of December this year, Ambiental will host a free breakfast event to discuss the opportunities posed by the Flood Re scheme, and strategies for improved underwriting. Taking place in the iconic Lloyd’s Old Library in London, keynote speakers from leading insurance companies and government bodies will detail how new types of data and modelling can be used to make decisions, as well as offering insurers alternative strategies to ceding to Flood Re.
A detailed agenda and full list of keynote speakers will be available in the coming weeks, however for more information, please email [email protected]