Water-Value

It seems as though the 200, 000 properties categorised at ‘significant’ flood risk flood risk by the EA may be insurable post June 2013. This is pending the introduction of a regime which is currently undergoing consultation.  

The government (inc. Defra) and the ABI (Association of British Insurers) are looking at two proposals put forward by the insurance industry that would see cover remain available to all households, regardless of flood risk. The conclusion is set to be announced in the next few weeks.

The ABI is proposing that all homes continue to be covered, but with a cap on the annual premium they would pay. Any property with a risk priced above this cap would get its insurance from a central pool of money. The pool would be paid for by a small levy on every home insurance policy in the country.

An ABI spokesman commented: “The Government is now engaged in constructive and serious discussions about the idea with us, and we are doing the maths to work out what the level of cap and amount of levy might be … We think this system is the way forward and will address the issues of availability and affordability of insurance”

The models proposed are similar to the MFAG (Morpeth Flood Action Group) scheme that is currently in operation. The MFAG scheme was recently presented to Richard Benyon (MP - Floods Minister) and Defra. The ‘Morpeth Model’ operates on a similar basis, and based on a principle that affordable flood insurance for properties at high risk of flooding would be subsidised form a financial pool established by the insurance industry. This pool is funded by the Community Flood Levy, added to the cost of all household insurance policies (either as a flat rate or an additional percentage of the insurance premium).  

The ‘Morpeth Model’ has synergy with ‘Project Noah’, one of the schemes being considered by government. ‘Project Noah’ was a model developed by Marsh and the reinsurance intermediary service provider Guy Carpenter, together with the Landmark Information Group. This forms part of newly developed flood risk pricing model that claims to able to identify and calculate the flood risk to every residential property in the UK, which will enable targeted defence investment. Marsh claim that it will enable insurers to transfer residential flood risks, less a small retention, into the international reinsure market. 
A Defra spokesperson today said that: “Industry-led solutions that allow insurers to compete even for the high risk homes, without government intervention in the market, would give the best value for taxpayers’ money”

Lisa Bachelor, Guardian money journalist stated that: “Industry insiders now believe a combination of the two approaches is likely, and that an announcement will be made in June or July” 

Further stating: “Now, both the government and insures agree they are close to a conclusion. The government has ruled out the idea of subsidising all flood insurance, but has confirmed it is considering targeting funding at those most in need. If it adopts the ABI solution it would underwrite any losses that went beyond the central pool of money”

References and Resources:

Pickard, J., (2012) Insurers offer hope for flood zones Financial Times 2 April 2012 (http://www.ft.com/cms/s/0/e53944fc-7ce5-11e1-9d8f-00144feab49a.htmlaxzz1uI4b3uap, 08 April, 2012)

Wheal, C., (2012) Project Noah Promises Flood Reinsurance POST Online 3 April 2012 (http://www.postonline.co.uk/post/news/2165553/project-noah-promises-flood-reinsurance, 08 April, 2012)

Oxera (2012) Agenda Advancing Economics in Business: Why does it always rain on me? A proposed framework for flood insurance Oxera Economics Consultancy (http://www.oxera.com/cmsDocuments/Agenda%20September%2011/Flood%20insurance.pdf, 08 April, 2012)

Bachelor, L., (2012) Flood-risk households await insurance guarantee: Government and insurance industry get closer to agreement over on going cover for houses in flood-risk areas Guardian 8 April 2012 (http://www.guardian.co.uk/money/2012/may/08/flood-risk-households-insurance-guarantee?newsfeed=true, 08 April, 2012)