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Stalemate over flood insurance is bad news for homeowners

The government and insurance industry are at loggerheads over how to pay for the increasing cost and risk of flooding damage in the UK.


by Michelle McGagh on Nov 29, 2012 at 15:03

Stalemate over flood insurance is bad news for homeowners

Houses awash with water and people being rescued from their homes are unfortunately becoming common sights during the British winter.

To make matters worse the government and insurers are locked in a stalemate over the best way to pay for flood damage to people’s homes. A pact they signed in 2000 is in danger of coming unstuck.

Following serious floods in 2000, which affected 10,000 properties in 700 locations and caused £1 billion of damage, the government and the Association of British Insurers drew up a statement of principles.

Under this agreement ABI members pledged to continue insuring properties at high risk of flooding if the government continued to invest in flood defences. This pact, which the ABI describes as a ‘sticking plaster’, comes to an end next June and the government and insurers are at loggerheads over what they should do done next.

Two-tier market

In recent years government spending on flood defences has been cut as the coalition strives to balance the country’s budget. This has intensified the ABI’s dislike for the statement of principles which it says has created a two-tier insurance market in which new entrants do not have to insure properties in high risk flood areas. This means they can offer cheaper premiums than insurers who did sign up to the agreement and who pay for the cost of providing  flood cover in all areas by making all customers pay a bit more for their home insurance.

‘Those insurers who abide by the statement of principles subsidise the cost of high-risk policies across all policyholders,’ said a spokeswoman for the ABI. ‘Although those in higher risk areas have higher premiums generally, those premiums would be a lot more if insurers did not cross-subsidise,’ she explained.

Worst case scenario

The ABI and the government have tried to patch up their differences in the past two years but as next summer’s deadline nears – with insurers already writing policies past this date – there is a concern that the problem won’t be solved in time.

If the agreement runs out then house insurance will become a free-for-all, which could either see many homeowners stuck by flooding blight or the price of everyone’s home insurance becoming more expensive.

If no solution is found up to owners of 200,000 homes at risk of flooding could find themselves forced to pay ‘thousands of pounds a year’ in premiums, according to the ABI, ‘or they would not get insurance at all leaving them at risk of not being able to sell their home...and having to sort it out themselves in the event of a flood’.

If insurers continued to insure high risk homes and cross-subsidise these policies then home insurance could increase for everyone.  ‘We do not want it to happen and we want to cover those people we are covering now but in a more competitive and sustainable way,’ said the ABI spokeswoman.

Dispute over new insurance fund

The ABI has comes up with the idea of Flood Re, which is an emergency fund that would pay out claims related to flooding.

Flood Re would be funded by premiums paid on policies that cover high risk homes and the extra cost that goes on to normal policies to cross-subsidise the riskier policies – which works out at £8 per policy according to ABI calculations.

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2 comments so far. Why not have your say?

derek farman

Nov 30, 2012 at 16:04

The large insurance groups traditionally buy catastrophe reinsurance to cover them against the type of disaster scenario we have seen with the recent floods.

There are many specialist catastrophe reinsurers around the world such as Swiss re and Munich Re. These companies have specialists who calculate the probabilities of time scale over which these catastrophes occur .

If the cost of such reinsurance is too high then this is where the government could step in to help pay part of the premium or even coinsure the risk .

The problem is no insoluble. It just needs some positive thinking and expertise to sort out .

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Dec 01, 2012 at 14:00

Why don't they means test it, everything else seems to be even postage stamps

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