House of Commons Library

Household flood insurance

Published Wednesday, July 5, 2017

This note outlines issues relating to flood insurance within the UK and the establishment of the Flood Re scheme by the Water Act and subsequent Regulations.

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The continued general availability of domestic flood insurance (the commercial market is excluded from this scheme) at reasonable cost had been under pressure for some years following an increase in the number and severity of flood events.

The increased incidence of localised flooding presented insurers with a dilemma.  They could either:

  • carry on as before, and face repeated, huge, claims from a minority of claimants, which is unprofitable for them,- 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.

Commercial considerations weighed heavily on that choice and the availability of insurance in flood risk areas (at any price) became noticeably restricted as insurers pulled out of the market.

Mindful of the social consequences of a market failure, government sought, with the industry, a long-term solution which encompasses a reduction in the totality of risks (better flood defences) whilst maintaining, to a degree, the traditional ‘pooling of risks’ pricing model and the minimum of market interference.

Formal moves to find a solution began with a Flood Summit in September 2010 which discussed what would happen to flood insurance after 2013. 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. The period up to 2013 was characterised by efforts on behalf of both the industry and government to find a long term solution.  These efforts were against the backdrop of a temporary industry - government agreement expiring in the summer of 2013.

What emerged was a ‘pact’, in 2015, between both sides which would be governed by an agreed statement of principles and a new insurance vehicle – Flood Re.  The main points of the ‘pact’ are

  • 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.

The primary legislative framework for Flood Re is the Water Act 2014, which received Royal Assent on 14 May 2014. The 2014 Act commenced with effect from 1 January 2015. The Flood Re Regulations put in place the secondary legal framework including its funding and administration.  Flood Re went live in April 2016.

A Library Research Paper includes details of the Bill.

Flood Re has its own website now.  Many questions that Members or constituents might have are covered simply on its FAQ pages.

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 insurance aspects of this topic should be addressed to Timothy Edmonds (x4318), questions about flood defence measures to Sarah Priestly (x2930).

Commons Briefing papers SN06613

Authors: Tim Edmonds; Oliver Bennett

Topics: Environmental protection, Financial services, Flooding, Water

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