Agreement on flooding insurance needed to re-assure consumers
Published: 28 November 2012 | Author: Bernard Clarke
The recent flooding of homes in parts of the UK – and the possibility that more home-owners may be at risk from further heavy rainfall – has highlighted the need for the government and insurers to reinforce consumer confidence by announcing a solution that will mean all householders are able to continue to take out affordable insurance cover.
The continuing impasse between the government and the insurance industry on the availability of flood cover leaves both consumers and lenders in a state of uncertainty about the future.
The Association of British Insurers (ABI) has put forward a proposal for a not-for-profit fund that it says could ensure that the 200,000 properties in the UK with the highest risk of flooding will be able to continue to take out affordable flood insurance over the long term.
The ABI’s proposed flood insurance fund involves what it describes as a "small levy" on all insurance policies, reflecting the level of existing price cross-subsidy between households with low and high risk of flooding, backed by a temporary overdraft facility provided at the outset by the government.
Insurers want the government overdraft facility to cover the scheme in the event of major flooding in the first few years of the operation of the proposed scheme. Funding put into this by the government would be paid back as the scheme progresses.
The existing statement of principles covering flood insurance was established in 2000 as a temporary measure, but is due to expire at the end of June next year. The statement was an agreement under which insurers would continue to provide flooding cover to almost all homes and the government would invest more in improving flood defences.
But the ABI says that understanding of flood risk has improved significantly since the principles were first introduced. As a result, it says, both insurers and the government accept that the statement of principles is now outdated and cannot continue in its present form.
Following excessively wet weather in the spring, we sought to alert consumers to the end of the statement of principles, and the need for a new agreement between the government and insurers to continue to make affordable insurance available to all home-owners. Since then, however, there have been few tangible signs of progress – and the "impasse" referred to by the ABI continues.
If a solution is not forthcoming, lenders will need to consider how best to approach this issue with their existing customers, and the extent to which a lack of affordable insurance cover for some consumers increases the risks in advancing new loans. At this stage, however, the focus needs to be on finding a solution to the continuing insurance problem.