Flood insurance - Commons Library Standard Note - UK Parliament

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Flood insurance - Commons Library Standard Note

Published 28 June 2013 | Standard notes SN06613 Amended 03 January 2014 Authors: Tim Edmonds Topic: Environmental protection, Financial services, Flooding, Water The continued general availability of domestic flood insurance at reasonable cost has been under pressure for some years following an increase in the number and severity of flood events. New arrangements to ensure that affordable flood insurance remains widely available were subject to industry and government debate for two years against the backdrop of a temporary agreement set to expire in the summer of 2013. This note discusses the background to this issue, explains the final agreed solution and describes what householders can do to keep their flood-related insurance premiums down.

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Household flood insurance

Standard Note: Last updated: Author: Section SN/BT6613 3 January 2014 Oliver Bennett; Timothy Edmonds Science and Environment; Business & Transport Section

The continued general availability of domestic flood insurance at reasonable cost has been under pressure for some years following an increase in the number and severity of flood events. New arrangements to ensure that affordable flood insurance remains widely available were subject to industry and government debate for two years against the backdrop of a temporary agreement set to expire in the summer of 2013. Measures to provide a more permanent solution to the problem of flood insurance nonavailability formed part of the Water Bill which is currently before the House. A Library Research Paper includes some of these details. This note discusses the background to this issue, explains the final agreed solution and describes what householders can do to keep their flood-related insurance premiums down. Information about the insurance aspects of this topic should be addressed to Timothy Edmonds. Information concerned more directly to flood defence measures to Oliver Bennett.

This information is provided to Members of Parliament in support of their parliamentary duties and is not intended to address the specific circumstances of any particular individual. It should not be relied upon as being up to date; the law or policies may have changed since it was last updated; and it should not be relied upon as legal or professional advice or as a substitute for it. A suitably qualified professional should be consulted if specific advice or information is required. This information is provided subject to our general terms and conditions which are available online or may be provided on request in hard copy. Authors are available to discuss the content of this briefing with Members and their staff, but not with the general public.

Contents
1 2 3 Introduction The original statement of principles The build up to 2013 3.1 4 5 The Flood Summit working group 2 3 4 4 10 12 12 13

Agreement at last How can flood-related insurance premiums currently be reduced? 5.1 5.2 Property-level measures Flood defences

Introduction

Household flood risk in the UK is typically covered by standard household insurancein many other countries the Government is the insurer of last resort for flooding or flood insurance is bought separately from normal household insurance.1 Currently, insurance premiums often do not fully reflect the actual flood risk to properties. As a result the costs of flood damage are often shared between the premiums of all householders, whether or not they are at risk of flooding. This cross-subsidy means that many householders living in high-risk properties may not be paying a price which reflects the risk.2 Insurance is fundamentally a way of reflecting and reducing risk. If all groups face generally the same risk of an event, standardised levels of premiums can be used to pool the risk fairly between the population. However, as incidences of localised flooding appear to have become more common over the past ten years or so insurers have faced a dilemma. They can either carry on as before, and face huge claims from a minority of claimants which make the service unprofitable, or, due to better statistical and environmental data, restrict the availability of insurance offered to exclude areas prone to flooding or introduce substantially differentiated premiums for people in different areas. Since the former option is not sustainable in a commercial way in the long term, left to itself the industry will adopt the second option. But the consequences of this are not attractive socially. Properties with a flood claims experience would face huge increases in premiums if their policies were to be commercially viable. If they chose to restrict cover, it would create enormous problems for large sections of the property market. Unlike car insurance, buildings insurance is not mandatory however, it would be virtually impossible to get a mortgage on any property that was not fully insured. Hence, such properties would become unsalable

1 2

The Pitt Review: Learning lessons from the 2007 floods, Cabinet Office, June 2008 Flooding and insurance: a roadmap to 2013 and beyond: An interim report of the flood insurance working groups, Defra, May 2011

except at substantially reduced prices. From a consumer PR point of view, both outcomes are unattractive to the industry. The industry has already adapted to a degree. The cross-subsidy is expected to diminish over coming years as insurers more accurately reflect flood insurance risk in premiums. This may lead to lower insurance costs for most people, but large cost increases for those in high flood risk areas.3 Some insurers already decline to insure in certain areas, or will continue to do so only for existing customers. Mindful of the social consequences of a market failure, the government has sought with the industry to find a long term solution which encompasses a reduction in the totality of risks (better flood defences) and a continuation to a degree of the traditional pooling of risks pricing model. What emerged was a pact between both sides which would be governed by agreed statement of principles.

The original statement of principles

Flood insurance provision was guided by a statement of principles first agreed in 2002 between the then government and the Association of British Insurers (ABI). This was a set of commitments by the industry to provide flood insurance for domestic properties and small businesses for as many customers as possible. Insurance premiums and other terms such as excesseswould be based on an assessment of the risk of f looding but will be offered in a competitive market. It also stated that continued provision of insurance was dependent upon action by the Government to reduce flood risk by investing in defences. Put simply, the industry would provide cover where homes were protected at or above government minimum standards of flood defence and those properties which would be covered in the future by planned improvements to flood defences. An ABI press release outlined the key terms of the agreement:
The ABIs new Statement of Principles sets out a basic approach for member companies providing flood insurance. It will ensure that there is a competitive market for insurance based on the actual risks of flooding. It will apply from 1st January 2003 and will replace the current temporary agreement that was created by the industry following the floods of autumn 2000. The Statement of Principles has five objectives full access to a competitive market for insurance for the vast majority of homeowners and small businesses; improved security for those who live and work in high-risk areas; new provisions for those who wish to sell their homes or businesses; better use of new solutions to make properties insurable, even in high-risk areas where improvements to flood defences are not planned; a clear incentive for Government and local authorities to continue to invest in flood defences.

Around one in ten of the UKs 20 million homes and businesses is situated in the floodplain. The vast majority of these around three quarters are protected against the risk of flooding at or above the Governments own minimum standards, and ABI members will continue to make flood cover available for them as a standard feature of
3

Flood risk and insurance: A roadmap to 2013 and beyond: Final report of the flood insurance working groups , Defra, December 2011

household and small business policies. Premiums and other contract terms will reflect the different levels of flood risk, as they do for other factors such as crime. The new Statement of Principles will also benefit policyholders who face higher risks of flooding (i.e. are not protected to the Governments minimum standard s). Where improvements in flood defences sufficient to meet the Governments standards are scheduled for completion by 2007, insurers will maintain flood cover for homes and small businesses which they already insure. Going beyond the terms of the existing two-year agreement, insurers will also make special efforts to maintain cover for properties when they are sold, subject to satisfactory information about the new owners and proposed use of the premises. Where improvements in flood defences are not planned, insurers will examine the risks on a case by case basis and use their best efforts to continue to provide cover. The Statement of Principles commits insurers to work with policyholders where necessary to see if action can be taken to make the property insurable. This might include the use of accredited flood protection products and temporary defences. 4

Extreme rainfall in 2007 led to widespread flooding in England and Wales. It was arguably the largest peacetime emergency since World War II, causing 13 deaths and 3.2 billion in damage.5 6 In response the Labour Government commissioned Sir Michael Pitt to undertake an independent review of the floods. It concluded that urgent and fundamental changes were needed to reduce flood risk. However, it generally supported the arrangements for flood insurance provision. Following a review of flood insurance in 2008 the ABI and Government updated the statement of principles. It ensured that cover would continue to be available to the vast majority of householders. The Department for Environment, Food and Rural Affairs (Defra) website summarised the changes:
The revised statement... ensures that flood cover will be available as a standard feature of household and small business policies for a) those properties defended to a minimum standard of 1 in 75 (in other words where the design standard of defences is such that the probability of the properties being flooded in any single year is 1.3% or less), or b) for those properties where such defences are scheduled for completion within the next five years. Premiums will continue to reflect different degrees of risk. 7

The statement does not apply to buildings constructed after 1 January 2009..8

3
3.1

The build up to 2013

The Flood Summit working group

The period up to 2013 was characterised by efforts on behalf of both the industry and government to find a long term solution. The Government hosted a Flood Summit in

4 5 6 7 8

Statement of Principles, ABI press release November 2002 The cost of the 2007 floods, Environment Agency, January 2010 The Pitt Review: Learning lessons from the 2007 floods, Cabinet Office, June 2008 Defra Website as of 10 December 2009 Flooding and insurance: a roadmap to 2013 and beyond: An interim report of the flood insurance working groups, Defra, May 2011

September 2010 to discuss what would happen to flood insurance after 2013.9 Three working groups were set up to take forward a work programme. The groups were comprised of representatives from Government, the Environment Agency, the insurance industry and related organisations. Working Group 1 considered future flood insurance models. The Group agreed a set of common principles that a model should address:
1. Insurance cover for flooding should be widely available 2. Flood insurance premiums and excesses should reflect the risk of flood damage to the property insured, taking into account any resistance or resilience measures 3. The provision of flood insurance should be equitable 4. The model should not distort competition between insurance firms 5. Any new model should be practical and deliverable 6. Any new model should encourage the take up of flood insurance, especially by lowincome households 7. Where economically viable, affordable and technically possible, investment in flood risk management activity including resilience and other measures to reduce flood risk should be encouraged. This includes, but is not limited to direct Government investment 8. Any new model should be sustainable in the long run, affordable to the public purse and offer value for money to the taxpayer 10

The Group raised concerns about the future affordability of flood insurance for those in high flood risk areas, particularly for those on low incomes:
The Group agreed that the primary problem in the future will be the affordability, rather than the availability, of flood insurance premiums for households and small businesses. There are two main causes of this: As the level of cross-subsidy in the market decreases there will be a small benefit for many and a potentially large cost for a few homes at high risk of flooding. There should be further analysis done to quantify the size of these costs and benefits and who receives them. Climate change means that the frequency, severity and type of flooding will change. The impact of this flooding on the cost of insurance premiums will depend on both the success of flood defences in preventing damage and the extent to which properties are vulnerable, i.e. the number of properties that are built in highrisk areas. Account should be taken of the risk presented by surface water flooding, including how the pattern of future development affects run-off of surface water. The resulting rising costs of repair are likely to create an upward pressure on premiums across the board.

Combined, these effects are likely to result in premium increases for those at the highest risk unless steps are taken to manage exposure. This will be harder to bear for households on lower incomes so further analysis should be undertaken to show which people, and how many, will be uninsured or under-insured as a result.
9

10

Flooding and insurance: a roadmap to 2013 and beyond: An interim report of the flood insurance working groups, Defra, May 2011 Ibid, Defra, May 2011

It is difficult to predict the extent of any problems with availability of cover as these depend on reactions of the market. However, it is far more likely that households will go without cover because they cant afford it than because there is not an insurer willing to provide it. Future analysis should look to identify and quantify the specific communities or income groups who might require support as a result of these changes. This is crucial in informing decisions about how and if interventions in the market for flood insurance should address the problem. It will also be important to understand over what timescale changes will take place. The Group has identified several possible secondary consequences of reduced levels of flood insurance. They include mortgageability, and increased economic cost of flooding as well as health and welfare implications. These should be included in any assessment of the value of Government action. 11

A number of suggestions were made about a replacement insurance model. For example, the ABI suggested a free market for flood insurance, and thoughts on how flood insurance could potentially be subsidised above a certain premium threshold.12 Alternatively the National Flood Forum proposed a pooling arrangement for flood risk, with equal flood risk premiums regardless of risk.13 However the Group did not settle on any one modelit said more information and analysis was required. The following actions were proposed:
1. The British Insurance Brokers Associations (BIBA) has worked with the Group to produce a guide, including top tips for those who are struggling to access flood insurance. 2. A similar signposting guide will be produced for insurers to encourage them to signpost effectively for those who are struggling to find cover. 3. An agreement should be developed which ensures that industry signposting follows best practice. 4. The Government will look at further ways to encourage take up of insurance by lowincome households, including the potential of insurance-with-rent schemes for social housing. 5. The Government will decide whether a pooling model represents value for money. Work will be undertaken to: i. Assess mechanisms for entry to the pool, particularly bearing in mind the relationship between equity considerations and administrative costs ii. Assess level of subsidy required and what pooling approach best represents value for money iii. Decide whether there are better mechanisms for delivering a subsidy which achieve the same end 6. Work should be undertaken to look at ways local authorities can take insurability into account when developing their flood risk management strategies.

11

12

13

Flood risk and insurance: A roadmap to 2013 and beyond: Final report of the flood insurance working groups, Defra, December 2011 Flooding and insurance: a roadmap to 2013 and beyond: An interim report of the flood insurance working groups, Defra, May 2011 Ibid, Defra, May 2011

7. Analysis should be undertaken to give an idea of the pace of any changes in the market for flood insurance and to quantify the extent of their impacts. 14

The Government was not supportive of any future model that involved a public subsidy of insurance premiums.15 However, the Minister, on 19 December 2011 said the Government would consider what additional measures might help safeguard the affordability of flood insurance for households, and that it would make an announcement in 2012:
As part of this ongoing work we will be considering the feasibility, value for money and deliverability of targeting funds to help those most in need, building on the analysis undertaken by the working groups established after last years flood summit. This may include models where communities might work together to secure affordable insurance. These options will be considered over the winter months in order to make further announcements in [spring 2012].16

The Government continued negotiations with insurers throughout 2012. In July 2012 it considered a pool insurance option:
As part of discussions, the Government is now considering how the existing crosssubsidy that takes place within the insurance industry can be adjusted to make sure insurance prices remain affordable. Most insurance companies already raise a small sum from policy holders to cover the cost of insuring homes at high risk of flooding. The insurance industry has asked the Government to formalise this arrangement, so that all households can continue to get affordable insurance, and to correct a current imbalance in the market whereby some insurers are at an advantage in being able to solely offer products to low risk customers whereas others currently have to offer cover to many high risk properties.17

In September 2012, it was reported that an agreement had been close, but that the Government had concerns that the option put forward by industry would lead to unacceptable increases in insurance premiums for everyone.18 The Government failed to produce its own proposals in 2012 despite saying it would. The preferred plan of the insurers was for a flood insurance fund to be built up from levies on all properties. This fund would meet emergency claims on the scale of those recently made and would moderate the need for extreme premium price rises. In November 2012 the ABI produced its version of the main unresolved issue between it and government:
The ABI has called for the Government to commit to a joint solution to ensure long term affordable flood insurance for high-risk households, describing the current state of talks aimed at reaching an agreement as being at an impasse. This follows the Governments refusal to consider providing a temporary overdraft facility to a proposed not-for-profit special insurance fund for 200,000 high-risk households which will otherwise struggle to get affordable household insurance when the current arrangements come to an end next year. The temporary overdraft facility

14

15 16 17 18

Flood risk and insurance: A roadmap to 2013 and beyond: Final report of the flood insurance working groups, Defra, December 2011 HC Deb 19 December 2011 c140WS HC Deb 19 December 2011 c140WS Progress on affordable flood insurance, Defra, 11 July 2012 Flood waters raise fears over home insurance, The Guardian, 26 September 2012

would be used to pay claims if there were 2007-style floods in the early years of the scheme before it had built up its reserves."19

In March 2013 the Environment Committee held evidence sessions which looked at the question of a post principles solution. Speaking on behalf of the ABI, Nick Starling outlined the consequences of no extension of the statement of principles and no Flood Re solution:
If there was no legislation in place and if Flood Re was not agreed, then we would have the free market, and we reckon the implications of that are that around 200,000 households would find insurance either unaffordable or unobtainable. That is the sort of scenario we are looking at. If there is an agreement on Flood Re coming into place, no doubt part of that would be looking at what transitional arrangements there might be.20

Later a representative of the insurance broking industry, suggested that the number of people who were truly uninsurable, at any price, was significantly less, about 10,000.21 The witnesses were also asked about an alternative to Flood Re, namely a mutualisation of flood risks, where, some proportion of claims would be paid for by all insurers after the event, rather than from a prior fund. Mr Starling commented:
Obviously I have not seen what their system is. It sounds a little bit like Noah, where all the flood risk is seeded and goes into a mutual pool. The reason that we developed Flood Re is because in a free market there will be circumstances where the risk reflective premium is too high for most people, or it is just not available. If you look at Germany, for example, it has a flood zone system, and in the highest flood zone it is effectively impossible to buy flood insurance. Our members could operate within that market, but it just means that for some people the cost would be unaffordable. That is why we have put forward Flood Re as a way of meeting that cost. It is designed to have minimal impact, with a levy that is as low as possible, but it needs a back-stop in circumstances where there is a very large event in the early years and the levy needs to increase to pay that back. It is really around these issues of affordability as much as anything else that we think this model needs to be developed. I cannot comment on the one that has been mentioned to you, but the issue around Noah, which it sounds similar to, is that it does not guarantee that affordability.22

Another witness, from the insurer Marsh Ltd, outlined the differences between Flood Re and Flood Mu as it is called:
Let me start with concerns with Flood Re; then I have notes on five significant differences, which I will get to very quickly. As for the concerns with the design as is, they are both pooling arrangements, so they both assume that you need to redistribute risk to keep affordability in place for the high-risk homes, particularly those of poorer householders. The question is how you do it. I already made the comment about the passing of risk to the Government, and through a tariff mechanism it is likely to end up with the customer. It seems strange to me that essentially you have got the insurers acting as Government in making social policy, pricing off wealth rather than risk, and you have got the Government acting as the insurer, taking the back-stop on the pool, which has been observed. That is what the reinsurance industry exists for; there are about 13 billion of category excess reinsurance treaties out there already, so it is well above any conceivable event. The tail is cheap to insure, by the way. It is not a
19 20 21 22

ABI press release November 2012 Environment, Food & Rural Affairs Select Committee; oral evidence session 20 March 2013,Q199 Ibid Q250 Ibid Q216

problem to take it within the industry if it needs to. It does not give the Government enough skin in the game. I think the Government is taking the tail in Flood Re because they want the Government to feel some ownership for building flood defences. It is the wrong place to put the Government. The Government should be in at the beginning, applying social policy. It happens to be a smaller number; it is also a much more bounded number. I imagine the Government has had enough of back-stopping financial institutions. It plays the role and leaves the existing Catastrophe XL to take care of the tail. The next biggest concern is it flattens the cost of risk. You have this 300 set charge. My concern with that-look again at the banking crisis and the mispricing of risky and subprime mortgages-is that you are going to create some unforeseen consequences when you do that. Builders, planners, owners are going to find it attractive; above that threshold risk is no longer paid for, and that is a dangerous place to be. The final and biggest concern is that it is going to cost a lot because of exactly the point you were making: it invokes a whole new entity, Flood Re, which is effectively an insurer. It then needs to buy reinsurance in a spot where reinsurance is the wrong thing to use, because those risks are concentrated, regular, known. Reinsurers like to diversify their risks. Reinsurance is a very expensive proposition, and it is probably why a reinsurer is attached to the ABI proposal. It is good news for the reinsurance industry; it is not particularly good news for the consumer, who will end up paying for that cost through the tariff. I come to my six points on what is different. We would argue for a percentage, not a flat rate, because that leaves risks with the creators of that risk, from the builder to the owner to the insurer, into the reinsurance market. We would argue for doing it on claims, not premium; because claims are real, it leaves premium and the pricing of premium to be set by the market, and it makes it much harder to form a tariff. As soon as you allow a tariff to be formed-a preset, known amount, be it 8 or 20, and we will argue about that later, I am sure-it is very tempting, that implicit or explicit charge. The second point is claims, not premium. Third, we would do it post event, not up front. Do not create a new pool; simply reallocate the costs as they arise, then use the existing structures. That is what insurers exist for, to distribute these risks. That is why they have reinsurance. Fourthly, we would put the Government in, as I have mentioned, via social intervention, not as a de facto reinsurer. That is what Governments do all the time, and how it is done is to be decided by the Government. Finally, that would leave you with a simple clearing house for the claims, rather than creating this whole new entity. Those are the differences. We think it has a number of advantages. I will not list those, because they are set out in the paper. 23

As part of evidence to the same enquiry, the Minister, Owen Patterson, outlined the current governments spending plans:
We will be spending 2.3 billion over the course of this Parliament. We went to the Treasury and under particularly difficult circumstances we got another 120 million in the autumn statement. If you add in the nearly 148 million we are bringing in from partnership funding schemes, which also lead to much better value, we can say that over the four years of this Coalition Government we will be spending more on flood defences than on the preceding four years. We have made a very strong case for this.24

He outlined the difficulties involved with finding a replacement for the Statement of Principles:
23 24

Ibid Q243 Environment, Food & Rural Affairs Select Committee; oral evidence session 26 March 2013,Q294

The ABI has a number of ideas on how we replace the statement of principles. We have our own comments on those. I talked to the ABI on the telephone on Friday. I had a meeting with the ABI yesterday. I have another meeting with the ABI tomorrow. We really are working on this in a very intense manner, but there is no point in coming up with an agreement just for the sake of it. We have to get it right. To answer your question, though, we do have the Water Bill coming through as a vehicle at the end of the summer. It is almost certain that whatever solution we come up with, it will need some primary legislation and the ABI is perfectly well aware of that. We have a massive interest with them in getting this right for the long term and coming to a solution. We really are working very closely with them. Chair: Realistically, it cannot be in the Water Bill because we are probably not going to see that before June. The chances of getting primary legislation through before the end of June to deliver a replacement to the statement of principles-it is quite a tall order. Mr Paterson: I am suggesting that we could add clauses to the Bill, but you are right that we are getting to the end of March and time is running out. We do not have very long to consult and get new clauses into the Bill for July. What I would suggest will probably happen is that, whatever the legal solution is, if that came into legislation came into Parliament in July, that would not have Royal Assent until spring next year. Almost certainly, whatever we do, we would have to run on with the statement of principles as a temporary measure..25

On 16 May 2013 the insurers announced an extension to their voluntary scheme for a further month beyond the deadline of 30 June 2013 to give adequate time to address the remaining issues.26

Agreement at last

Agreement on a way forward was announced as part of the statement on infrastructure spending. At its heart the deal includes a commitment by the industry to offer insurance in high risk areas at affordable prices; the establishment of the Flood Re scheme run by the industry; a guarantee that the government would be primarily responsible for losses due to a catastrophic event that Flood Re could not meet; and increased government spending on flood defences.

On 27 June 2013 as part of his speech about infrastructure investment, the Financial Secretary said:
Too many Members of this House, on both sides, have in recent years seen the devastation that flooding can cause in their constituencies. We need to work with the private sector to protect families from the threat of flooding, so we will provide 370 million in 2015 and increase that in real terms every year to 2020. More than 400,000 households will be protected over this decade. Insurance also has a vital role to play in helping households deal with the consequences when flooding does occur. I am pleased to tell the House that we have now reached an initial agreement with the Association of British Insurers on the future of flood insurance. The industry wants to do the right thing and so do we. We have always said that we wanted to find a solution
25 26

Ibid Q371 ABI letter to Owen Patterson, 16 May 2013.

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that works for households at risk of flooding, wider bill payers and the taxpayer. The industrys proposed scheme, known as Flood Re, promises to do that by effectively limiting insurance prices for high-risk households. Up to 500,000 households would be helped, with support targeted towards those on lower incomes. Support would be funded by a levy on insurers, something the ABI has promised us will not increase customer bills in general. Importantly, there will be no cost to taxpayers. There remain many details to work through, so we propose also to take powers to allow us to regulate for affordable flood insurance should that prove necessary. We are seeking these powers in the Water Bill, which we are today introducing to Parliament. The Secretary of State for Environment, Food and Rural Affairs is today launching a public consultation on our proposed approach, and we welcome views on it. He will introduce our final proposals to Parliament as a Government amendment in the autumn.27

More detail on the financial aspects can be found in the accompanying document Investing in Britains Future. It says:
The risk from flooding continues however. To demonstrate the Governments commitment to managing this, it has set for the first time a specific long term funding settlement for flood defences, rising to 370 million in 2015-16 and then protected in real terms to 2020-21. This provides a total of 2.3 billion and represents a real annual increase of 18 per cent compared with the Spending Review 2010 period.28

The ABI issued the following statement:

Key elements of the framework are: Flood Re will be run and financed by insurers as a not-for- profit fund which will cover the cost of flood claims from high risk homes. Insurers will pass the flood risk element from those households deemed at high risk of flooding to the fund. Premiums for the flood risk will be calculated based on council tax banding up to a maximum limit depending on the Band. Flood Re would charge member firms an annual charge of 180million.This equates to a levy of 10.50 on annual household premiums and represents the estimated level of cross-subsidy that already exists between lower and higher flood risk premiums. Flood Re will be designed to fully deal with at least 99.5% of years. Even in the worst half a per cent of years, Flood Re will cover losses up to those expected in a 1 in 200 year a year six times worse than 2007 with Government taking primary responsibility working with the industry and Flood Re for distributing any available resources to Flood Re policyholders should claims exceed that level. Providing operational issues, including governance and regulatory approval, are resolved, the aim is for Flood Re to be up and running by summer 2015, with regular progress reviews taking place to ensure Flood Re can proceed. For now ABI members will voluntarily continue to meet their commitment to continue to offer flood cover to existing customers under the previous Flood Insurance Statement of Principles.29

The terms of the deal appears to make it unlikely that government would need to contribute funds of any magnitude. Properties built after 1 January 2009 remain uncovered. Insurers
27 28 29

HC Deb 27 June 2013 c467 Investing in Britains Future, p8.25 ABI website

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guarantee to continue to offer cover to existing customers where flood risk is not significant according to the Environment Agency, or where the Government has announced plans to reduce flood risk below significant within five years. More details on the agreement can be found on the ABI website here. Further negotiations are needed to decide exactly how some of these arrangements are effected, in particular the nature of the governments responsibility in the case of a 1:200 event. The details of the proposed clauses to be added to the Water Bill, can be found in the Departments document Water Bill: commentary on Draft Flood Insurance Clauses. This follows publication of a consultation document in June 2013. Consultation on the draft clauses ended on 20 September 2013. Modified draft clauses were included at the committee stage of the Water Bill (Bill 146 2013/14) and a brief commentary can be found in the Library Research Paper on the committee stage. The introductory section of the commentary on draft clauses states that:
The proposed draft of Part 4 of the Water Bill consists of fourteen clauses in total. Clauses one to four relate only to the FR [Flood reinsurance] Scheme, clauses five to ten relate only to the Flood Insurance Obligation, and clauses eleven to fourteen relate to both the FR Scheme and the Flood Insurance Obligation. The territorial extent of the clauses is UK-wide.30

5
5.1

How can flood-related insurance premiums currently be reduced?

Property-level measures

Property owners can directly reduce the implications of flooding by adopting two types of property-level measures: Resistance measures that keep water out of properties, such as air brick covers Resilience measures that reduce the damage caused when water enters a property, such as water-proof wall plaster More information about these measures can be found here and here. Insurers might be willing to reduce premiums once such measures are in place, although homeowners should liaise with their insurer as there is no guarantee that they will do so. 31 The Environment Agency recommended:
Preparing your property for flooding will limit the distress and damage caused by it, which means less costly repairs AND less time out of your home or business premises. The cost of purchasing and installing products to keep floodwater out of your property will depend on the size of your property and the type of flood you want to protect against. For example, according to the Association of British Insurers (ABI), to protect your property against shallow flash floods could cost between 2,000 - 6,000. To keep water out during periods of prolonged flooding will take bigger changes and could cost between 20,000 - 40,000.

30 31

DEFRA, Water Bill: commentary on Draft Flood Insurance Clauses, p6 Flood risk and insurance: A roadmap to 2013 and beyond: Final report of the flood insurance working groups , Defra, December 2011

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Therefore, if there is a high risk of flooding to your property, you may want to consider one of the following: Property level flood protection funding - We have made funding available to some local authorities and local Environment Agency teams to undertake flood surveys of properties in high risk areas, where the provision and installation of household flood protection measures may also be funded. More information about the scheme can be found on our Property level flood protection funding webpage. Contact your landlord if youre a tenant, to discuss flood protection options and your willingness to put in place and maintain any barriers. If your home or business has been flooded or youre doing r enovations, repair it so that its more resistant to flood damage. Speak to your insurance company about repairs that will reduce the damage from future flooding, and possibly reduce excess charges or premiums too. Check with your mortgage provider to see whether your mortgage can be extended to cover the cost of making your property more flood-proof (provided you have sufficient equity in your property). 32

5.2

Flood defences

New flood defences can also reduce flood risk and therefore insurance premiums. The new funding arrangements for flood defences mean that local communities can contribute to flood defence works that might not otherwise go ahead. See the standard note on flood defence for more information. However, it is recognised that improved flood risk is not always taken into account by insurers. This can be because of a lack of detailed local information on risk.33 The Environment Agency and Association of British Insurers (ABI) stated that supplying insurers with more information could lead to reductions in premiums:
You should speak to your local Environment Agency office to see if they have any more detailed information that may be able to qualify the National Flood Risk Assessment for example maximum anticipated flood water levels which can be compared to the actual floor height of your property. You may be able to supply your insurer with information specific to your property that shows that the flood risk to your property is less than that applying to the area where it is located for example You may have better topographical information to demonstrate that your property is higher than maximum anticipated flood levels You may be able to demonstrate that all occupied areas of the house are situated above these known levels You can show that your community or you have taken individual action to stop flood water getting into your property or to reduce the damage if it does get in.

32 33

Coping with the cost, Environment Agency, viewed 18 January 2012 Flood risk and insurance: A roadmap to 2013 and beyond: Final report of the flood insurance working groups , Defra, December 2011

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 You can consider asking an independent professional (for example members of an appropriate chartered institution such as the Chartered Institution of Civil Engineers, Royal Institution of Chartered Surveyors, Chartered Institution of Water and Environmental Management or the Association of Building Engineers), who is experienced in assessing flood risk for individual properties, to assess the flood risk specific to your property. The Environment Agency is the lead authority in flood mapping and risk assessment, but has no role in determining insurance cover or setting premiums that is a matter for insurers. However the Environment Agency will take account of evidence from others on flood risk when updating their maps, so please share any information provided to your insurer with your local Environment Agency office. Call the Environment Agencys 24 hour Floodline on 0845 988 1188 or National Customer Contact Centre on 08708 506506 (Mon to Fri 8am to 6pm) or e mail enquiries@environment-agency.gov.uk34

Defra, the Environment Agency and the insurance industry are currently working to improve the consideration of local flood risk information in insurance.35 See here for more information.

34 35

Flooding information sheet, Environment Agency and Association of British Insurers, June 2009 Flood risk and insurance: A roadmap to 2013 and beyond: Final report of the flood insurance working groups, Defra, December 2011

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