Insurers would be forced to make up the difference if scheme cannot meet its claims obligations

A reduction in the government spending on flood defences means that Flood Re could face higher-than-expected claims in the future, according to ratings agency Fitch.

Under new funding arrangements, future spending on flood defences, which forms part of the joint understanding that Flood Re is based, will remain below the peak figure of 2010-2011.

The government had claimed that the coalition was spending a record amount of money on flood defences, but the amount will only reach that level if partnership funding from local councils is included in the total.

Revised figures show that, without the partnership funding, the government is spending £2.3bn on flood defences over the period 2011–15, compared with the £2.4bn spent in 2007–11

A study by the Committee on Climate Change estimated that spending would need to increase by around £20m a year on top of inflation until 2035 just to keep the number of significant-risk properties steady.

The ratings agency says this funding gap could mean that Flood Re’s funds and reinsurance cover may not be able to meet the outgoings if more properties are left at risk of flooding.

In a statement today the agency added:  “In that situation, insurers would be required to make up the difference in the near term, but would then pass on the cost to households through an increase in the annual premiums.

“A longer-term reduction in spending could increase the number of properties in England at significant risk of flooding.

“The storms are likely to increase the sector’s combined ratio by around 3.4 percentage points. The negative impact on insurers’ earnings will therefore be limited and will probably be further reduced by future price increases.”