Fund would step in after a certain premium level, keeping insurance affordable

The ABI has hatched plans for an industry-backed fund to underpin the continued provision of insurance for households and small businesses in high flood risk areas.

Under the risk-pooling arrangement, policyholders in high flood risk areas would be liable for premiums up to a certain level. Beyond that yet to be defined affordable level, the cost of premiums would be shouldered by a pooled fund to be paid for by an industry-wide levy.

The proposal, which has been developed by the ABI with the support of consultancy Oxera, is due to be discussed at next Tuesday’s Department for Environment, Food and Rural Affairs (Defra) flood summit.

Unlike the terrorism fund of last resort Pool Re, the risk pooling arrangement would not be backed by the public sector because of the government’s reluctance to commit to new spending.

The aim of the proposal is to ensure that home and contents insurance remains affordable for those people living and working in flood-prone areas after 2013, when the statement of principles – under which the industry has agreed to continue to provide cover in such localities – runs out.

The ABI proposal does not eliminate the problem of cross-subsidy, under which those living in high flood areas are effectively subsidised by those who are not.

But it would mean that companies that have a legacy of business in flood-prone areas would no longer be at a competitive disadvantage to newer entrants to the market, which are more easily able to ignore such communities.

The ABI proposal was developed following an initiative by residents in the north-east town of Morpeth, which has been severely affected by flooding, to examine the scope for using reinsurance arrangements.

Biba technical services manager Steve Forsham said that the ABI’s proposal would enable cover for flood-prone properties to continue to be offered as part of standard products.

The summit will also look at the scope for greater reliance on specialist brokers to provide insurance solutions for consumers and SMEs.

Next week’s Defra event, which takes place next Tuesday, will be addressed by environment secretary Caroline Spelman.

But Charles Tucker, chairman of the National Flood Forum, the umbrella body for flood-affected communities, said that the government was not showing sufficient leadership.

He said: “There’s a lack of urgency and a failure to provide leadership. We feel there’s a need for the government to take a lead on this issue.”

The summit takes place against a backdrop of heavy cuts to the flood budgets following last autumn’s comprehensive spending review and the government’s new policy to transfer more responsibility for funding flood defences from the state to local communities and the private sector.

An ABI spokesman said: “At the summit next week, we will provide an update on work being undertaken, with the aim of ensuring that, after the end of the statement of principles in mid-2013, a competitive market for flood insurance exists.

“We will update on our work surrounding resilience and flood-resistant repair and, as one of the options being considered, work being undertaken on what any form of flood pooling arrangement might look like.”

We say …

? International comparisons show that no other country’s arrangements are as effective as the UK’s at providing accessible and affordable insurance for high flood risk areas.

? These comparisons show that tailoring premiums more closely to risk will make insurance unaffordable in some parts of the country, with potentially severe knock-on consequences for the UK’s property market and wider economy.

? A levy would be painful for those insurers that do not currently cover flood risks. But the flood insurance conundrum has no easy answers. The industry should run with this risk pool plan.