Has Flood Re had "unintended" consequences?

Bank of England claims it has – but insurance industry has other priorities

Has Flood Re had "unintended" consequences?

Catastrophe & Flood

By Jen Frost

Flood Re could be having a greater effect on property prices in wealthier zones than for those in lower income and more deprived areas, the authors of a Bank of England staff working paper centred on real estate values have claimed.

Insurance sources, though, believe flood risk focus should be elsewhere and the report could show holes in the institution’s understanding of the insurance market.

“While Flood Re is expected to help lower-income households, our results suggest that Flood Re has a weak impact in lower income and more deprived areas but a stronger impact in higher income and less deprived areas,” the Bank of England report said.

“This finding provides a unique insight in examining the effectiveness of Flood Re and the design of future public policies in mitigating climate risk.”

The bank’s research found that households in wealthier areas tended to benefit more in terms of balancing out the negative effect of flood risk on property prices, though all households did benefit overall.

Flood Re “disproportionately” benefits wealthier properties in terms of value appreciation of flood prone properties’ value, the researchers said.

The paper’s findings were, nevertheless, “largely to be expected”, according to Hannah Davidson, Aviva senior home underwriting manager, who renewed the insurer’s calls for more to be done to make sure lower income households do not suffer from an upcoming April rate hike – the first since 2019.

“It will always be the case that in considering the relative value of Flood Re protection of a high-risk property, the value of that protection will be higher where there is greater value at risk,” Davidson said.

“By using a rating mechanism based on council tax band only, it will always appear that those in higher council tax bands, when assumed as a proxy for income, gain more benefit.”

With many lower income households – in 2017/18 42% of adults under 40 in low-income poverty were renting privately versus 26% of non-poor, a proportion that has almost doubled in 20 years, according to data shared in a University of Glasgow paper – renting, this means they are not directly affected by the impact of protection on property value.

“Analysis of our own data suggests a higher proportion of lower council tax banded properties (A-C) are ceded than higher tax bands and this is true regardless of whether the risk is a buildings, contents or a combined policy,” Davidson said.

“The proportion of ceded buildings and combined risks in these bands is significantly higher, suggesting that homeowners in lower council tax bands are benefitting from the Flood Re scheme.”

Prior to taking up her current role, Amanda Blanc, Aviva CEO, authored the 2020 Blanc Review, which recommended that the government should consider “more direct ways” to encourage tenants to take up contents only cover in high-risk flood areas.

This included a call for a review into the impact of Flood Re cover on the affordability of contents insurance for low-income households.

“As highlighted in the Blanc review and in our own Building Future Communities Report last year, we believe more needs to be done at a policy level to encourage take up of contents insurance by tenants and lower income households in high flood risk areas,” Davidson said. 

“This is a multi-faceted issue relating to attitudes towards insurance in general and is not specific to only tenants living in areas of high flood risk.”

Contents only, or renters’, insurance is an “underserved” area that the insurer has recently looked to tackle through its reinsurance partnership with US headquartered insurtech Lemonade, which launched in the UK earlier this month.

For Davidson, looking at how Flood Re rate rises in April will affect low-income renters should be a priority.

“The increase in rates next April, for the first time since rates were reduced in January 2019 across all council tax bands will represent an increased cost for households already facing financial challenges in the current cost-of-living crisis,” Davidson said.

“We believe Flood Re could give consideration to the premium charged for contents only risks in the lower council tax bands to ensure Flood Re protection remains accessible to those living in these properties.”

While a greater “bounce effect” may be expected for higher value properties, the report’s focus has left some industry commentators scratching their heads.

“Weak” data, what happens in 2039 when the pooling scheme is intended to end, and the Bank’s understanding of key insurance trends were all key issues in the report flagged by Ethics and Insurance independent ethics adviser Duncan Minty in an October blog post.

Average property premiums in higher risk flood areas have fallen at least 50% since the onset of the scheme, according to Flood Re.

“I would estimate the actual figure to more likely be in the 200% to 500% range,” Minty said.

“That difference matters, for the impact of Flood Re is circa 100 times wider than just those properties with a history of having been flooded.”

Premiums could once again “soar” in 2039, he predicted, dependent on whether flood defences were in place and how well insurers drill down into policyholders’ risk mitigation measures.

“The researchers appear to be working with a mindset that a price that is not fully individualised is a price that is unfair,” Minty said.

“If [the bank] is producing reports that in a particular research niche make sense, but which in the wider landscape of how insurance is changing do not make sense, then I believe it is beholden upon the Bank to take steps to at least recognise, better redress, that imbalance,” he added.

A Flood Re spokesperson said: “Flood Re is a joint initiative between the Government and insurers. Its aim is to make the flood cover part of household insurance policies more affordable.

“Since we were established in 2016, we have reinsured over half a million homes.

“Four out of five households with a previous flood claim saw a price reduction on their home insurance by over 50% and those customers are also able to shop around - 95% of householders with a previous flood claim can now get quotes from 10 or more insurers.”

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