Flood Re is the new UK reinsurance vehicle, established to provide a pooling facility to insurers for flood risks they feel unable to retain in their portfolios.

Set up by, and at the cost of, insurers in association with the UK government, the scheme aims to protect its insurance companies and ensure domestic properties in the UK with high risk of flooding can access affordable property insurance. 

Increasing urbanisation has resulted in higher flood risk and since 2007 the UK has suffered larger flood losses, with Storm Desmond currently causing devastation in Cumbria. Flood Re is expected to go live next year. By order of Parliament, the scheme will exclude properties built after 2009. The Association of British Insurers insisted on this to discourage county councils from giving planning permission on sites at high risk of flood. The scheme also currently excludes commercial property. Prior to it, insurance pricing allowed households less susceptible to flood to subsidise those at higher risk of flooding.

In August 2015, Flood Re invited insurers to register for the ability to cede its policies by April 2016. The scheme will rely on two sources of income: high flood risk policies ceded to Flood Re; and additional levies upon the insurance industry equivalent to the current cross-subsidy.

Levy I and Levy II

Insurers will be required to pay a statutory ‘flood fund' levy on all domestic property insurance policies of £10.50 per policy per annum which, currently, will not be passed directly to the customer. The levy will be used to buy reinsurance, pay claims and fund the running of Flood Re.

Reinsurance cover is currently being purchased for £2.1bn for approximately 2% of all domestic UK property policies.

The government has authorised the use of a top-up levy and approved the necessary framework. Levy II could be imposed upon member firms in the event Flood Re needs to raise additional funds. If, over time, Flood Re generates a surplus premium of emergency funds, these would be refunded to insurers.

The top-up levy will remove the burden from insurers of unplanned expense, although this has been criticised by the Committee on Climate Change, which argues that more emphasis should be placed on managing flood risk rather than reducing insurers' risk.

The amount of the statutory Levy I and other aspects, including borrowing, will be regulated by the UK government which, every five years, will reassess the level and the council tax banding at which the eligibility thresholds are set.

The affordable premiums for flood risk in England will be calculated based on domestic council tax bands A to H. Insurers may opt not to cede risks to Flood Re and keep the risk in-house.

The scheme has led to increased administration and ‘peril rating' by UK insurers to identify the element of flood risk within their portfolio. The results of this may impact an insurer's decision whether or not to cede to Flood Re.

Should you have any questions please contact Karen Jenner on +44 (0)20 7036 8070 or karen.jenner@fiscalreps.com