UK flood insurance deal faces delay

Thousands of homeowners could be left exposed to big rises in insurance premiums as a scheme to cover properties at high risk of flooding risks being delayed by up to a year.

More than six months after the government struck an agreement with insurers to set up the scheme, known as Flood Re, people involved have told the Financial Times that the plan is likely to miss its planned summer 2015 launch date.

Although they are confident the scheme will ultimately go ahead, several said it could take several more months to establish Flood Re, which will cap the costs of insurance for vulnerable properties.
“The timeline is ambitious but everyone is working hard to deliver for summer 2015,” the Association of British Insurers said.

Before Flood Re is established, the industry has agreed to cover properties at high risk of flooding by extending an arrangement, known as the “statement of principles”, that expired last summer.
However, although the industry is required to provide universal cover, it does not need to make it affordable.

Brokers warn that insurance costs for some homeowners are already rising sharply and a delay to Flood Re would result in a protracted period without a premium cap.

“They’re going to be paying higher premiums and excess levels until the new system comes in,” said Graeme Trudgill, executive director at the British Insurance Brokers’ Association.
Flood Re is designed to subsidise flood cover for the estimated 200,000 homeowners who might otherwise struggle to get affordable insurance, although new build and the most expensive properties will not be included.

The scheme will be funded through a levy of about £10 on every home insurance policy in the country.

There have been protracted negotiations about the details. They include who would foot the bill arising from an especially catastrophic flood – one that would be expected to strike the UK less than once every 200 years, with losses running into several billion pounds.

Flood Re would not cover the costs of such a disaster. Under the memorandum of understanding last summer, the government agreed to assume “a primary responsibility for an effective response”.
Although the wording was agreed with the ABI, some insurance executives fearthat the language is too “soft” and are holding out for a firmer commitment. “Contracts matter in insurance,” one executive said.

Another sticking point has been whether the government or insurance companies would be entitled to any surplus funds when Flood Re is wound up several years hence. The arrangement is expected to remain in place in the long term but not in perpetuity, partly because insurers did want to give an open-ended commitment.

In the summer we saw this more as a joint venture [with the government] but it’s becoming incredibly politicised. - Insurance executive
Huw Evans, director of policy at the ABI, said debates about funding were resolved and 2014 would be “a year of implementation for Flood Re”. The industry also played down the risks of big rises in premiums before Flood Re is established.
“Insurers remain committed to helping customers access to affordable and available flood insurance,” Mr Evans said.

Some executives believe outstanding questions about how the scheme is funded could be resolved by reinsuring Flood Re.

People involved have been examining the possibility of transferring the risks to capital markets through issuing Flood Re bonds.

The two sides have also made progress on another sticking point: who would stump up if, in the early years of the scheme, Flood Re cannot afford to pay claims because it has not yet accumulated enough funds.

Insurers were unwilling to lend the necessary sums to Flood Re because that would risk making their profitability volatile. However, the industry has agreed to provide an equity capital injection that would avoid this problem.

Even so, there are concerns about how long the Flood Re negotiations have taken given that a new company needs to be set up from scratch.
“It’s been painfully slow,” said one person familiar with the talks. “The thrust of the problem is the lack of a proper chief executive.”

It would be inconceivable that it [Flood Re] doesn’t happen but we don’t want the government to think they can get whatever they want, - Insurance executive
The industry has now started the search for a chief executive. If an appointment is made soon, some people involved believe the scheme could still be launched in summer 2015. Only the most pessimistic believe the scheme will be delayed by about year.
Otto Thoresen, director-general of the ABI, is expected to give an upbeat assessment of Flood Re when he speaks to the Lloyd’s of London insurance market on Wednesday.
In the unlikely event that the talks collapse altogether, ministers have a back-up plan. They have drawn up legislation that would oblige insurers to cover at-risk properties.
The measures have caused disquiet among some insurance executives, who believe ministers have used the threat of compulsion to coerce them into agreeing to their terms on Flood Re.
“In the summer we saw this more as a joint venture [with the government],” one said. “But it’s becoming incredibly politicised.”

Another likened the measure to a proposal by Ed Miliband, the Labour leader, to cap energy bills.
“It would be inconceivable that it [Flood Re] doesn’t happen but we don’t want the government to think they can get whatever they want,” another executive said. “The industry ultimately still has a choice.”

The environment department said: “We are fully committed to implementing Flood Re by the summer of 2015. Guaranteeing access to affordable flood insurance for households at high flood risk is a main government priority.”

Additional reporting by Jim Pickard

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