Last updated: 5 April 2016
At a glance
- All lenders require borrowers to have suitable buildings insurance with flood cover as a condition of their mortgage. The availability and cost of flood cover can be a concern, particularly in high flood risk areas.
- Flood insurance costs can affect mortgage affordability and the amount a lender might lend. Properties could become un-mortgageable if the cost of insurance became prohibitive.
- Until recently, a temporary voluntary agreement between government and the insurance industry ensured the continuing availability of affordable flood cover.
- As this arrangement has now expired, government and insurers have implemented the Flood Reinsurance Scheme, called Flood Re, to protect eligible households in high flood risk areas. The scheme became operational on 4 April 2016.
- When the scheme was being developed, CML responded to government consultations from the Department for the Environment and Rural Affairs (DEFRA) on the scope of the scheme, and on the associated draft regulations.
- The CML supports the introduction of the scheme, but would like it to be open to more households and types of insurance policy.
- On 13 November 2015, Flood Re was 'designated' as the Scheme Administrator by Ministers and became a publicly accountable body with statutory objectives and powers. Regulations to implement the Flood Re scheme were debated in the House of Commons on 15 September 2015 and then were passed through the House of Lords on 27 October 2015.
- Flood Re had submitted a comprehensive application for authorisation to the financial regulators. This application for regulatory authorisation was approved during the week prior to the scheme being launched.
- If you are affected by flooding, government information can help you prepare. Call Floodline on 0345 988 1188 if you need help during a flood.
We support the introduction of the Flood Re scheme, to ensure that buildings insurance with flood cover continues to be available and affordable for homes at a high risk of flooding.
We would like the scheme to be more inclusive and provide protection for a wider range of households – including more of those which are commercially insured in the leasehold sector, as well as homes in the private rented sector, which are subject to buy-to-let finance.
We would like greater clarity about how the scheme will ensure that premiums and excesses remain affordable, and that transition to risk-reflective pricing is achieved gradually over the scheme’s life.
We would like there to be opportunities for key stakeholders including the CML and lenders to be engaged in the development of important aspects of how Flood Re will work in practice – including development of the scheme’s statutory plan to manage and deliver the move to risk-reflective pricing, and arrangements to monitor how effectively the scheme ensures premiums and excesses remain affordable during transition.
Why this is important for lenders
All lenders require borrowers to have suitable buildings insurance with flood cover, as a condition of their mortgage. The scheme is important because it will ensure borrowers in high flood risk areas can obtain and afford the flood insurance they need.
Without the scheme, there would be implications for existing and new lending if borrowers were unable to obtain or afford buildings insurance with flood cover.
For existing customers:
- Customers might allow their insurance cover to lapse
- Customers might breach the terms of their mortgage to insure the property at all times
- Lenders might not be aware that cover is not in place, or is insufficient
- Costly repairs for uninsured damage might mean customers default or enter mortgage arrears
- There could be increased risk for lenders if they have to repossess a flood-damaged property
- There could be additional costs for lenders in checking that customers are suitably insured.
- Regulators might want lenders to hold more capital cover for uninsured mortgaged properties
For new customers:
- Insurance premium costs have to be factored-in to assessing mortgage affordability.
- New customers might find that high insurance costs, in terms of premiums and/ or excesses could affect the amount they can afford to borrow and the LTV a lender is prepared to offer.
Ultimately, a lack of affordable flood insurance might mean that some properties could become un-mortgageable and sellable only to cash buyers who might look to pay a reduced price.