Flood Re, the UK Government’s scheme to pool flood risk, launched early April backed by £2.1bn in reinsurance. The initiative, which follows the principle of terrorism insurance fund Pool Re, intends to give around 350,000 homes in flood-prone areas access to affordable home insurance, but teething problems
impacted the broker community’s ability to sell policies.
A lot of finger pointing took place at the launch of Flood Re, with software houses blaming insurers for delays and insurers blaming the software houses. The issue is that most insurers are offering Flood Re policies via their direct channels, seemingly at the expense of broker access to the same products.
Graeme Trudgill, executive director at BIBA, said: “We’ve been in dialogue with the main insurers and software houses over the last few months and have repeatedly raised issues and concerns over competition where it appears direct arms have been prioritised over broking channels. It is clear some providers are lagging behind others… We want Flood Re for brokers and we need the market to get it resolved as soon as possible.”
Although Flood Re shares similarities with Pool Re, it also has some unique features and requirements that have complicated the process. The main issue here is that because the fund is effectively created from a levy on council tax charges, council tax banding needs to be taken into consideration.
According to Trudgill, from the get-go a number of insurers are using systemsthat won’t automatically be able to accept Flood Re business via brokers. So BIBA is instead urging them to ensure that they have manual methods of processing quotes for flood risk properties.
Flood risk is high on the agenda for the global insurance industry. At the opening of the COP21 climate talks in Paris in December, Ban Ki-Moon, secretary-general of the United Nations, pledged to elevate the role of the insurance industry in protecting the vulnerable against the impacts of climate change, aiming
to address the needs of the nearly 634 million people (a tenth of the global population) who live in at-risk coastal areas just a few meters above existing sea levels, as well as those living in areas at risk of droughts and floods.
Resilience is a key pillar of the UK scheme, which is designed to help local authorities and communities across the UK to be better prepared for flooding and better educated about flood prevention.
Building Flood Re
The regulations to enable the creation of Flood Re were signed by UK flood minister Rory Stewart in November 2015 and the Prudential
Regulatory Authority and Financial Conduct Authority signed off on the initiative late March. Insurers Munich Re
and Swiss Re are known to be contributing significant support, with a further 45 companies providing capacity to meet requirements.
The initiative has been largely welcomed by the industry, which sees significant opportunity in a vastly underinsured market as well as major scope for building resilience. Ryan Thomas of Willis
Towers Watson says that with Flood Re laying the foundations, “We have to go beyond campaigning and actually start investing in true market development. Can we as an industry make the next step in helping the government in making investments in this area?”
Mamiko Yokoi-Arai, principal administrator of directorate for financial and enterprise affairs, OECD, applauded the UK government for taking preventative measures and the insurance industry for supplying protection, but warns: “There does need to be investment from the public side, but also a conversation needs to take place so the investment is not made in vain.
“Flood has just become uninsurable in a number of countries because it is just not commercially viable or the premiums are just too high,” she says.
Martyn Parker, chairman of global partnerships at Swiss Re, refuted this comment, suggesting instead that risk improvement initiatives could tip the scales.
“I don’t think it’s true that flood is uninsurable,” he says. “If you live on the banks of a river that every second year puts water in your house, that’s probably uninsurable. But you could make it insurable by putting flood defences in, if people mitigate the risk, it can become insurable.”
Swiss Re, as one of the main backers of the initiative, is understandably positive about the project, with Parker saying that Flood Re should be celebrated as a programme that reaches into a marketplace that was unprotected for a long time.
“Just look at Australia during the Brisbane floods in 2010,” he says. “The government raised income tax by 1% for three years to cover the costs of the rebuild. This was a last resort because it was a very politically unpopular move, but it could have been avoided with an initiative like Flood Re.”
Prevention not cure
At its heart, Flood Re is a temporary measure – a transitional arrangement with a 25-year life span. The idea is that insurers will build flood risk pricing into their models, with a view to enabling lower prices and excesses to be offered to consumers by the end of 2039.
This outcome is only likely if the UK develops strategic flood defences. The government has come under fire in recent years for cutting back on flood-defence
spending between 2011 and 2014 and focusing on post-incident strategy rather than preventative spending. Brendan McCafferty, chief executive of Flood Re, says: “If we are to successfully reduce premiums and excesses for flood-prone homes in a sustainable way over the coming decades, action must be taken to reduce the cost of flooding. These properties will need to be made more resilient when flooding happens and action needs to be taken to bring down the cost of repairing flood damage.”
There is also the matter of a significant coverage gap in the commercial sector, which is currently excluded from the programme. According to the British Property Federation (BPF), this leaves millions of businesses and homeowners in the rental market excluded and vulnerable.
BPF CEO Melanie Leech warned that as flood does not discriminate, it is unfair to leave businesses, leaseholders and families living in the private rented sector to sink or swim on the open market. “In particular, people who own their own flats will wonder why they should be denied access to affordable buildings insurance under the new scheme, while those who own their own house will not,” she says.
Supply and demand
Some believe that focusing on the demand side of the equation, rather than the capacity side, is the key. “If corporates were made to disclose their risks [to flood] like insurers are, it will transform the demand for insurance,” says Willis
Towers Watson’s Thomas.
Swiss Re’s Parker agreed. “The supply side is now there but we need to get the demand side moving,” he says. But all things considered, the Flood Re initiative has, for the most part, been warmly welcomed and has generated international interest, particularly in Canada, where Don Forgeron, president and CEO of the Insurance Bureau of Canada (IBC), has been campaigning for a collaborative national flood programme like the UK’s.
Extreme weather events driven by climate change are on the rise and the majority of Canadians, like their UK counterparts,mistakenly believe that flood protection is included in home insurance policies. Canadians that suffer flood damage typically rely on the Disaster Financial Assistance (DFA) programs provided by the federal, provincial and territorial governments.
But the 2013 floods in Alberta and Ontario caused $5.3bn in damages, of which only $3bn was insured. Those having to rely on the DFA programs discovered that, even with the financial assistance received, they were out of pocket tens of thousands of dollars.
And it’s a global problem. The annual economic costs of disasters around the globe have increased five-fold since the 1980s, increasing from US$25bn a year in the ‘80s, to US$130bn a year in the 2000s. So can the UK’s initiative become a life belt for the global economy, or will it turn out to be a failure of Titanic proportions? Parker from Swiss Re sees momentum building for the latter: “In Canada you have massive issues with flooding,” he says, “But Canadian officials are talking to Flood Re chiefs to see if they can share knowledge and methodology with a view to establishing something similar,” he added.