Insurers extend temporary flood insurance cover agreement as Government talks continue

Members of the Association of British Insurers (ABI) have been abiding by a 'Statement of Principles' since 2000 for the provision of flood insurance cover. The agreement was due to expire on 30 June, but the insurers have agreed to honour the principles for an extra month until 31 July. The ABI said that it hopes to strike a replacement deal with the Government on how to address the growing cost of flood cover to the industry before the new deadline elapses.

"The ABI`s decision to voluntary extend the Statement of Principles for a further month from 30 June 2013 is to be welcomed by the real estate sector as there has been great concern as to how the knock on from homes in risk areas no longer being insured for flood would impact on the commercial sector, not least on funders and their approach to risk evaluation," property and environment expert Linda Fletcher of Pinsent Masons, the law firm behind Out-Law.com, said.

"It is hoped that the Government will now seriously engage with ABI to come to a workable solution for all and before the summer recess so that any necessary legislation to implement a new form of cover can start the required parliamentary process," she said.

The ABI has estimated that one in six homes in England and Wales is at risk of flooding. It wants the Government to underwrite some of the risk in order that insurance firms can keep flood-risk premiums at an affordable rate for householders.

Since 2000 ABI members have been providing flood insurance cover for existing customers under certain circumstances through a 'Statement of Principles' agreement. Under the agreement insurers will "renew flood insurance to existing customers, providing the flood risk is adequately managed or government has announced plans to reduce their flood risk within five years", according to the ABI.

However, the trade body has said that the current arrangement has become "unsustainable". It said that it has distorted competition in the insurance market "since there is no incentive for new insurers to offer flood cover" whilst customers may have been "stuck with their existing insurer" and had to pay increased premiums and excesses.

The ABI said that the decision of its members to extend the Statement of Principles for a month reflects the fact that progress is being made with the Government in their negotiations. It said, though, that there are still "some difficult issues to resolve".

The body said that a failure to reach an agreement would result in there being "an open market for flood insurance" in the UK, where insurers would be "free to decide who they offer flood insurance to and at what price".

"The flood risk continues to worsen," the ABI said. "Last year for example was the wettest on record in England and Wales, and the Environment Agency predicts the number of properties at significant flood risk will rise by 350,000 in 2035. This could make the cost of flood insurance unaffordable for many at risk. Difficulties in getting affordable flood insurance could have implications on mortgages and the housing market."

The ABI has proposed that a new "flood insurance fund" (Flood Re) be established where a "small levy on insurers" would be applied in order to make flood insurance affordable to "those at high flood risk" and where premiums would be "set at an agreed amount". It said it was "likely" that insurers would pass on some of the levy costs to their customers.

"The amount of the insurer levy, the set Flood Re premium, and other details are currently being discussed," the ABI said in a flood insurance Q&A document. (3-page / 127KB PDF)

Otto Thoresen, director general of the ABI added: "The Government and the ABI continue in constructive discussions on the future of flood insurance, specifically on how the components of the ABI’s Flood Re proposal can be designed to best meet the objectives of the Government, the insurance industry and, most importantly, the needs of those at risk of flooding. There are still important issues to resolve and no deal has been reached, but negotiations are advanced and we will bring negotiations to a conclusion as soon as practicable."