Public Sector Risk Financing Perspectives in Europe/Middle East/Africa: Part III: Highlights of Recent Public Sector Initiatives
Charles Whitmore, Managing Director
Following years of planning by the insurance Industry and negotiation with a wide group of stakeholders including the government, Prudential Regulatory Authority (PRA), the Financial Conduct Authority (FCA) and others, Flood Re launched in April 2016. The overarching aim of the market-based scheme is to ensure better access to more affordable household insurance for those in high flood risk areas.
Flood Re brings long-needed stability to a marketplace recently beset by major flood events. A 25-year initiative, the value of the scheme reaches beyond providing a framework for the provision of insurance. All stakeholders are committed to working in unison with government to deliver its objective of boosting public confidence and understanding; re-establishing a functioning flood insurance market that supports the customer; and strengthening the overall national understanding of the peril to ensure that robust risk management strategies exist at all levels.
How does it work?
The household customer continues to purchase home insurance from an insurer in the usual way. Flood Re enables the insurers to reinsure (transfer) the flood risk element of a household policy to Flood Re at a pre-set (fixed) more affordable reinsurance premium based on the property’s Council Tax Band, with no variation for hazard level. The premium base has been fixed sufficiently low to be affordable for high-risk homeowners and therefore, the income for Flood Re is bolstered by “Levy 1;” a GBP 180 million annual levy on all UK household insurers calculated according to market share. In extreme circumstances, Flood Re can also call upon “Levy 2″ from household insurers to bolster the position of the company. The following diagram simplifies the construct of Flood Re:
Benefits to UK Homeowners
An estimated 350,000 homeowners are expected to benefit from Flood Re’s operation and stimulate a more competitive insurance market for flood. Early indications of Flood Re take-up and “on-boarding” by insurers and customers are very positive, with all major insurers participating in the scheme. At this early stage, customers are seeing direct benefits from the scheme with flood-exposed households experiencing reductions in premiums that can be measured in the thousands of pounds.
There was a high level of collaboration between Flood Re and Guy Carpenter in the launch of the scheme. Working together, the two teams developed key parts of the business plan submission to the PRA; the expected portfolio composition and build-up analysis; catastrophe modeling and realistic disaster scenario testing; and the design and testing of operational systems.
A GBP 2.1 billion multi-year reinsurance program was placed to ensure that the scheme could be operationalized. Despite its scale, the placement was completed on time and within budget. Flood Re also broke new ground in that the placement was the first known reinsurance program procured under the European Union (EU) and UK public procurement regulation, requiring the design of a bespoke reinsurance strategy to meet the regulatory requirements.
British Insurance Brokers’ Association (BIBA) Flood Scheme
In the United Kingdom, Guy Carpenter is working with BIBA on a new commercial insurance scheme for businesses that will provide flood cover for many commercial premises located in flood risk areas. The scheme aims to bring to market an innovative product to offer flood cover for many business and landlord risks that are ineligible for Flood Re.
Property Level Flood Resilience Project
The UK Government Department for Environment, Food and Rural Affairs (DEFRA), working closely with the UK insurance industry to implement Flood Re, also has a wider interest in improving property resilience throughout the country. Marsh, a leading global insurance broker, through their involvement in BERG (Business Emergency Resilience Group) has a leading role in the Property Level Flood Resilience project, which is designed to implement the necessary measures and incentives to “make people and their property less vulnerable to the physical and mental impacts of flooding.” This industry-wide project’s recommendations include the exploration of new building regulations; the introduction of rigorous independent standards and certifications processes; and the creation of an independent information portal to help homeowners and small- and medium-sized entities make their properties more flood resilient.
Italy Catastrophe Scheme
Guy Carpenter Italy is currently engaged with the Italian Association of Insurers (ANIA) in a joint initiative to quantify the risk faced by Italian communities from all natural perils exposing the country - earthquake, flood, flash flood, landslides, mudslides and tsunami. We worked with the Italian Government in 2014 and 2015 to develop a national scheme for affordable natural catastrophe insurance for homeowners. We continue our commitment to the Italian insurance industry with the goal of creating a new PPP (private-public-partnership) that combines the efficiency of private companies with the effectiveness of the State Guarantee.