UK’s Flood Re Launches to Bring Affordable Flood Cover to Homeowners

The U.K.’s new joint industry and government sponsored reinsurance scheme for flood risk began operating today (April 4).

Designed to help provide access to affordable flood insurance cover for households at the highest risk, Flood Re expects up to 350,000 households to benefit from the scheme over time. Commercial properties are excluded from the scheme.

Consumers will not deal directly with Flood Re and instead will buy the insurance from one of the insurers that offer Flood Re compatible policies. A list of these insurers is now available on the Flood Re website.

The company received regulatory approval to operate on April 1 and placed a £2.1 billion ($3.0 billion) reinsurance program in February.

“I am delighted to announce that Flood Re is now live and ready to accept policies. We have been working tirelessly to ensure we’re ready so that consumers can start benefiting from greater choice and more competition in the insurance market,” said Brendan McCafferty, chief executive of Flood Re. “This should make flood cover more affordable and accessible to those in high flood risk areas over time.”

He recommended that consumers check the Flood Re website to see which insurers are participating, speak to their current insurer and be prepared to shop around.

The insurance industry will be responsible for running, funding and capitalizing the not-for-profit Flood Re, which is directly accountable to Parliament, although the government is not providing financial support.

Flood Re’s Ratings Outlook

Standard & Poor’s Ratings Services has assigned Flood Re with an ‘A-‘ issuer credit and financial strength ratings, reflecting its “satisfactory business risk profile and strong financial risk profile.”

“The outlook is stable, reflecting our view that Flood Re will maintain capital adequacy at extremely strong levels per our capital model over the next three years, and that there is sufficient take-up of the scheme,” S&P added.

As a mutual company owned by the insurance industry, Flood Re “will effectively see high-risk properties subsidized by low-risk home owners, providing a temporary solution during Flood Re’s 25-year lifetime for those facing unaffordable coverage,” said a report published by Fitch Ratings, titled “Flood Re: Temporary Solution for Policyholders.”

“The Flood Re scheme will allow U.K. home insurers to pass the flood element of a home insurance policy to Flood Re at a fixed rate that we expect to be below the market rate,” said S&P in its commentary on the company. “This will enable homeowners living in the most flood-exposed areas of the U.K. to access affordable home insurance.”

“Insurance companies will pass on the risk of large flood losses through the purchase of subsidized reinsurance coverage from Flood Re,” Fitch explained, noting that every policy ceded to Flood Re will have a standard deductible of £250 ($355.60).

Flood Re will be funded by an industry levy of £180 million ($256 million), which is expected to be passed on to policyholders at £10.50 per policy on average, according to Fitch, although the rate ultimately will be based on the council tax band of the property insured.

S&P expects Flood Re to build up its premium base quickly, over the next three-to-four years, “as more insurers seek to compete for business in flood-prone areas without incurring exposure to flood risk.”

By the end of its third year of operation, about 400,000 polices will be held with Flood Re, providing gross written premium of £80 million-£90 million ($113.8 million-$128 million), said S&P, noting that it did not expect Flood Re to receive any financial support from the U.K. government if it was in financial difficulty. “Its ability to raise a discretionary levy mitigates the need for this support.”

“An additional levy may be imposed on insurance companies if claims are higher than expected and the fund falls below its regulatory capital level under Solvency II,” said Fitch, noting that Flood Re estimates such a levy may be required in one or two of the scheme’s first 10 years as reserves are built up from scratch.

Flood Re’s purchase of £2.1 billion ($3 billion) of retrocessional coverage from the global reinsurance market is expected to be sufficient to protect Flood Re up to a 1-in-200 year event, Fitch went on to say in its report.

Describing the details of Flood Re’s reinsurance protection, S&P said the company has an excess-of-loss program that is 50 percent placed alongside a 50 percent quota share agreement, which will provide cover up to £2.1 billion, with an excess-of-loss of £200 million ($284.5 million) in the first year and £350 million ($497.8 million) by the third year.

Any losses over £2.1 billion will revert back to the companies that ceded risks to Flood Re, S&P explained. “This limits the insurance losses to which Flood Re is exposed to £100 million ($142.2 million) in 2016 and £175 million ($248.9 million) in 2018.”

Flood Re also has a stop-loss contract in place to protect against a financial loss of over £100 million in any one financial year, which S&P did not think would be triggered.

Pragmatic Exclusions

Commercial properties, buy-to-let homes, and small-to-medium sized businesses operating out of non-residential homes are excluded from Flood Re’s cover, which Fitch said is “pragmatic.”

“There is less need for a ‘Commercial Flood Re’ as fewer potential policyholders face the level of unavailable or unaffordable premiums seen for home insurance,” explained Fitch, pointing to a Federation of Small Businesses survey, which revealed that only 6 percent of small to medium-sized enterprises in the U.K. had failed to find insurance.

While the scheme excludes residential properties built after 2009 to discourage further development on flood plains, Fitch said that more needs to be done to stop such building. “According to the Committee on Climate Change, home development on flood plains is growing at almost double the rate of growth outside flood plains. Fitch believes demand for new homes outstrips the negative implications for households lacking flood coverage.”

Improved Flood Risk Data

Fitch said that Flood Re will provide the insurance industry with improved flood risk data, which should help insurer with their pricing and modelling. “Flood Re will create a national aggregate database with information on properties and flood claims,” added Fitch, noting that this information can be used by the insurance industry to better price flood risk.

Topics Carriers Flood New Markets Reinsurance Homeowners Market