‘Robust’ flood insurance pool would be positive for industry, rating agency says

Floods flooding in Yorkshire

Free market flood insurance pricing for the highest-risk UK homes would be “politically unacceptable” and thus unlikely, rating agency Standard & Poor’s said in a new report.

Flood insurance premiums for the highest risk homes are currently determined by the Statement of Principles, an agreement where insurers agree to discount premiums for the highest risk homes in return for Government spending on flood defences.

But the Statement is due to expire on 30 June next year, and talks between the ABI and the government about a replacement for the statement broke down on Monday.

In its report on the impact of legal and regulatory changes on UK insurers, S&P said: “Should no agreement be reached by June 2013, in theory the Statement of Principles would expire and insurers would be free to set more realistic, market-driven premiums for homes in high-risk areas. We consider this unlikely, however, as it would be politically unacceptable.”

S&P cited ABI estimates that 125,000 of the highest-risk households are paying an average of £340 for buildings and contents insurance, £290 less than the market rate.

The rating agency said: “While this is an average figure for a subset of a subset, it would nonetheless represent a significant absolute increase in cost at a difficult time financially. Increasing the cost of insurance to this degree would also hinder the government’s plan to increase the national housing stock.”

The ABI’s proposed replacement for the Statement of Principles is Flood Re, which would charge UK homeowners an extra £10 on top of their household policies, which would then be paid into a pool that would pay flood claims. The pool would be protected by reinsurance.

The government talks over Flood Re broke down after the government refused to provide the pool with a temporary overdraft to protect against large losses before the pool was large enough to be self-sufficient.

Alternatives include Project Noah, a proposal by insurance broker Marsh and sister reinsurance broker Guy Carpenter, where the flood risk would be borne by global reinsurers.

S&P said a pooling mechanism “seems most politically and commercially acceptable”.

But the agency added: “Any solution would, however, have to be sufficiently robust to withstand a series of bad flood years. The ABI suggested a levy of £10 per policy. We expect that this would be inadequate.”

If a sufficiently robust pool is created, S&P said this would be “a positive ratings factor” for the industry.

But it added: “Any further delay would hinder insurers in setting their renewals rates for periods after 2013 and dent the confidence of policyholders.”