Government and insurers closer to creation of Flood Re funded by levy to insure homes prone to flooding

27th June 2013


The Government and the insurance industry have agreed a preliminary deal on flood insurance which will create Flood Re a central pool of money to help insure affected homes funded through a general insurance levy.

The Government claims hundreds of thousands of households in flood-prone areas will be guaranteed affordable flood insurance though insurance bosses say there is still a lot of work to be thrashed out on the details.

“The new agreement will cap flood insurance premiums, linking them to council tax bands so that people will know the maximum they will have to pay,” said the Department for the Environment, Food and Rural Affairs in a statement.

Funding will come from a new industry-backed levy will enable insurance companies to cover those at most risk of flooding says Defra. All UK household insurers will have to pay into this pool, creating a fund that can be used to pay claims for people in high-risk homes.

This may cause some controversy, for example about the fact that everyone who takes out insurance will end up having to pay to cover people with homes in areas prone to flooding. Some may criticise reckless development on flood plains and ask why they should pay to develop it.

For now Environment Secretary Owen Paterson said: “Flooding is terrible for anyone affected by it. We have worked extremely hard with the industry to reach an agreement on the future of flood insurance. There are still areas to work through but this announcement means that people no longer need to live in fear of being uninsurable and that those at most risk can get protection, now and in the future.”

Otto Thoresen, the Association of British Insurers’ director general, sounding a decidedly more sceptical note, said:  “Insurers’ priority has always been to ensure that flood insurance remains affordable and available for everyone who needs it. Today’s announcement is the start of a process that aims to deliver affordable flood insurance to high flood risk households.

“Getting to this stage has required compromise by both sides and there remain issues that need to be overcome. For Flood Re to be established successfully there needs to be an unprecedented level of partnership between the Government and the industry. But insurers and the Government are now working towards a shared vision, with Flood Re as the Government’s preferred choice.

“Flood Re would be a major undertaking for UK insurers and the work insurers have undertaken to get here reflects the industry’s desire to cover flood risk at an affordable price in the face of the increasing flood threat in the UK. The hard work now begins for both sides if we are to make this vision a reality.”

The proposals will be given legal backing through the Water Bill, published later today, and the Government says will last for at least the next 20 years. Until the Water Bill has passed through Parliament and Flood Re is set up, the industry will continue the current agreement – the Statement of Principles.

In addition, to help keep flood insurance affordable in the long-term, Defra says it will continue to invest in flood defences and has provided a six-year long-term commitment to provide £370m of capital investment in 2015/16 rising with inflation until 2020/21: a figure confirmed yesterday in the Government’s Spending Review.

It says the investment means that over 300,000 more households will be better protected by 2021, bringing the overall risk down and helping to secure affordable insurance for people long-term.

The Government says it is currently spending £2.3bn on flood defences meaning that 165,000 homes will be better protected by 2015.

New measures will also be added to the Water Bill that will be published later today to give Government legal powers to regulate the insurance industry, if needed, to keep flood insurance affordable.

The legislation will also allow water companies to switch provider. Environment Secretary Owen Paterson said: “We need to address growing pressure on our water resources. These reforms will make the sector more resilient and help us build a stronger economy.

“Creating a modern customer-focused water industry is crucial.  We have listened to businesses who want more choice, and our new measures will give them the freedom to switch supplier and find a more competitive deal.”

Last month, prior to this agreement, the Guardian one once of many papers reporting concerns that homes in affected areas would be left in limbo.


14 thoughts on “Government and insurers closer to creation of Flood Re funded by levy to insure homes prone to flooding”

  1. Drf says:

    Hi Shaun,

    “…Forward Guidance although what that actually currently means varies with each speech by Bank of England Governor Mark Carney.” Oh, come on now Shaun; surely by now you know that what “Forward Guidance” has always meant is to find every means possible to attempt to justify not raising base rate (including manipulating the markets) until the markets finally force a rise in interest rates, so as to avoid emarrasing the UK government with its increasing public debt servicing obligations (including moving the supposed goalposts whenever necessary)? That is what he was hired by Wasborn to do.

    1. Anonymous says:

      Hi Drf

      Whatever the machinations behind the Mark Carney appointment and the two cronies ( Shafik and Forbes) circumstances have changed. The rally in the UK Pound £ with its impact on consumer inflation and the weakness of wage growth have taken some of the pressure away for a Base Rate rise. The irony in all this is that rather than Gilt yields rising as they would conventionally do in a recovery they have been pushed back lower by the international desire for any sort of yield. Tonight around 6 Euro area nations have negative short-dated bond yields whereas our 2 year Gilt is at 0.84%. Who would have thought that 0.84% would look attractive?

      Many markets are in the wrong place but it seems to bother so few that we will soon see the unintended consequences of all this..

  2. Anonymous says:

    Has the BoE ever offered a plausible account of how QE and Funding for Lending are supposed to cause greater investment by non-financial businesses? I just don’t understand how it is supposed to work. I guess they could argue that a house price crash and admitting that many banks are insolvent would cause investment by non-financial businesses to drop further. But that would just be another saying that the whole purpose of QE and FL is to extend and pretend with house prices and bank (in)solvency. Am I failing to understand how clever the BoE is? I genuinely hope so.

    1. dutch says:

      I think you’ve pretty much nailed how stupid they are.But that’s a personal opinion.

      1. Forbin says:

        arrogance + stupidity + blindness to their own failings…..

        What could go wrong ?


    2. Paul C says:

      Yes, your analysis is correct. The BofE is ever more a political and vested interest group. It’s moves are right on track to protect the banking business (established players) and re-elect any UK Govt that hates change and challenge that comes with facing up to £ reality. The course for the titianic remains un-altered but perhaps the ice bergs are melting?

    3. Jim M. says:

      Extend and pretend seems to be working so far as the great British public is concerned.

      Which bothers me no end, and has done since about 2008 when I first learned that “inflate the debt away over 30-40 years” wasn’t just silly economist talk!

      Thank heavens for popcorn!

    4. Anonymous says:

      Hi Ian

      The original arguments for QE (mostly since redacted) were fairly simplistic. A fall in bond yields would make investment more attractive and the supply of liquidity would mean that the system would have the funds to finance it. Of course reality was a considerable disappointment.

      FLS went down a similar road as in reducing bank funding costs would produce more lending, except it has not meaning that the counterfactual excuse (things would otherwise be worse) has now been deployed for both.

  3. dutch says:

    off topic I see Barclays has announced it’s selling it’s Spanish retail bank.


    1. Forbin says:

      musical link ?

      “let it go ” from Frozen ….


    2. Anonymous says:

      Hi Dutch

      Over time UK banks have moved in quite a few areas. The problem is that they so often end up retreating after making losses! Quite an irony when of course they often tell other businesses what to do..

      This time around Barclays seems to have lost £500 million.

      There was a time when a sum of that amount seemed a lot of money.

  4. Eric says:

    Hi Shaun,
    Interesting stuff. I always find discussions about the strength of currencies a little confusing. After all, it’s all relative. Some will be “strong” and others “weak”, by comparison. Surely what matters for exporters is the relative weakness of the £. If Switzerland and New Zealand were our two major export markets we wouldn’t think the £ was strong at all!

    OTOH comparing the $ with the £ makes it look as though not much has changed over the last 10 or 20 years.

    I guess the trade-weighted index is the number that really matters.

  5. Anonymous says:

    Electric razors are part of the CPI basket and razor cartridge blades for non-electric razors. If non-electric razors are excluded, that’s surely not such a serious omission. When were non-electric razors removed from the CPI? Disposable razors were in for 2003, but they were already out for 2009. Were non-electric razors relying on razor cartridges ever part of the CPI? Andrew Baldwin

  6. Forbin says:

    I was being sarcastic :-)

    in that HMG would seek to exclude razor blades from the so called “core:” because to include them would push up its CPI figure , or to include them but use a minus sign and not a plus

    alluding to high inflation for house price purchases leading to a drop in CPI a while back ?

    Cynical ? moi?

    I know my government well……

    tricksies hobbitsies they are

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