Household insurance in the United Kingdom has historically provided flood coverage universally to all. Coverage nevertheless became threatened following persistent flooding in the 1990s and 2000s, according to Guy Carpenter’s Protecting our Planet and the Public Purse report.
In response, the UK government, in coordination with the private insurance market, entered into a series of voluntary agreements to sustain the availability of flood insurance for individuals. These agreements did not address affordability, and were not intended to be a permanent solution.
Between 2007 and 2016, a series of significant floods occurred across the United Kingdom causing widespread losses. Although flood continued to be covered by insurers, costs and deductibles increased, thereby decreasing the value of coverage to the consumer.
In 2016, the insurance industry, in cooperation with the UK government, established a joint initiative called Flood Re to support the availability and affordability of flood insurance for homeowners most at risk from flooding. Through Flood Re these risks are then shared with the reinsurance market.
Importantly, premiums charged by Flood Re to insurers are based on the properties’ council tax band, which are used as a proxy for affordability and a homeowner’s ability to pay insurance premiums. The theory is that more affluent homeowners able to buy homes with a higher council tax band should pay more than those in a lower council tax band. The market remains competitive as insurers still set their own pricing, but they do so knowing that their Flood Re premium is set off the fixed rates.
Flood Re transfers GBP 2.2 billion in flood risk annually to the reinsurance market. The UK government does not provide a backstop to Flood Re. As such, Flood Re is required to purchase enough reinsurance to minimize the possibility of any risk being returned to insurers. Flood Re is a privately owned organization with public accountability to parliament, and anticipates being designated by the UK National Audit Office as a public body. Since Flood Re is required to consolidate its accounts into the UK national (public) accounts, it could in theory deliver an unexpected increase to government spending should it experience a significant loss. This potential exposure to government is limited to GBP 100 million by a stop loss protection purchased by Flood Re.
As part of its Transition Plan, Flood Re is actively exploring resilience initiatives including Build Back Better and Property Flood Resilience measures in its efforts to achieve a normalized market that is not necessarily reliant on Flood Re. Mitigation is considered a core component in achieving a stable UK flood insurance market.
Flood Re has enabled more than 250,000 at-risk households to access more affordable home insurance. Four out of five households with previous flood claims have achieved premium reductions of over 50 percent since Flood Re came into force. Flood Re is in a unique position to act as a convener and the catalyst for change as society seeks to address flood risk.