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Why Flood Re proposals will sink some homes

‘Flood Re,’ the new agreement between the Government and insurers, threatens to deny insurance cover, as Sheila Manchester explains.

Sheila Manchester

flood-insurance-fire-engineThe UK’s flood-waters may have subsided but homeowners, tenants and landlords are still counting the cost. But another drama looms and it couldn’t have loomed at a worse time. ‘Flood Re,’ the new agreement between the Government and the insurance industry, threatens to deny insurance cover to many people in leasehold or rented homes and homes in the Council Tax Band H.

The property industry welcomed David Cameron’s £130m aid pledge but the British Property Federation (BPF) warns that although the extra funds pledged were necessary and helpful, they will not compensate for a lack of affordable flood cover within communities most at risk.

THE PROPOSALS

The Flood Re proposals, drawn up by government and the insurance industry, currently stand to exclude most leasehold flats, small businesses and private rented properties from building insurance, despite one in six properties being at risk of flooding in the UK – more than five million homes will not have access to the affordable flood insurance scheme.

Ian Fletcher, Director of Policy at the BPF, said, “We are witnessing the devastating effects that floods have on people’s lives. By excluding millions of properties from its new flood insurance scheme, those unable to punch their weight in the insurance market – particularly individual homeowners in leasehold flats and Buy to Let landlords – the Government is exposing people’s homes to risk, greater financial burden and insecurity.

“We urge government and the insurance industry to reconsider, excluding individual home-owning leaseholders purely on the basis that insurers’ IT systems can’t cope is a poor excuse.”

The BPF supports amendments being tabled in the House of Lords that will extend affordable flood insurance to those excluded groups and is urging Parliamentarians who care about housing supply and homeowners to support them. Hopefully, these amendments will make insurance under the new Flood Re scheme available and affordable for many more people, but this won’t
be clear for some time. In the meantime, we asked lettings insurers to put their ‘side of the story.’

Anthony Gaskell, Regional Account Director, Agent Assure, says, “The BPF suggests that the ABI have not fully considered leasehold properties as part of Flood Re, however, with the planned launch not until Summer 2015 it is hard to fully quantify what this scheme will look like once available to consumers.”

Gary Abraham, Sales and Marketing Director, Homelet, says that Flood Re covers 350,000 households which the Environment Agency says are at high risk of flooding, and aims to avoid 200,000 homes being left without flood cover. “A central fund will be created and maintained to pay for insurers’ claims – which will continue to be subsidised by the premiums from all home insurance policies, whether their properties are on flood plains or not. This does not necessarily mean that all landlords’ premiums will increase due to the levy – and their costs are affected by other factors, so if their premium did increase, it may not be due to the flooding element of their policy. It’s not just landlords that will be required to pay into the levy, Insurers are also being asked to contribute to the fund to cover the costs of additional administration – all of which will be taken into consideration when setting up new landlord policies.”

David Scutt, Managing Director, MARAS, lives in the South West, so he saw the effects of flooding at first hand, “There is an increasing risk of flooding to people’s homes. It’s a reality that insurers have had to face on two major fronts; increased claims outlay and the pressure during winter months where claims teams are stretched to breaking.
“The Flood Re agreement doesn’t extend to buy-to-let properties so there is a genuine risk that some landlords will struggle to get insurance if their properties are in high risk areas. In reality, there will most likely be cover available but it is highly probable that premiums will be high to reflect the increasing risk.

“Tenants should still be able to purchase contents cover and are most likely to be affected by their landlord’s inability to source appropriate insurance. Key policy covers such as alternative accommodation and liability cover are very much there to protect tenants as much as they are the landlord.”

Rob Medcalf, at Assurant says, “Our understanding is that, with the expiry of the previous ABI Flood Agreement, landlords with properties in flood areas may struggle to get cover. They may find that their current insurer does not offer renewal, offers renewal either on a basis that excludes flood claims or applies a larger excess to any such claim. The latter would be an apparent reversal of reductions back down to £250 that we have seen in previously increased flood damage excess (post 2010 events), made in an effort to increase market share.

Michael Portman at LetRisks says that Band H council tax payers may not be covered by Flood Re so premiums may rise or their homes may become uninsurable. “This could have a knock-on effect on house values in flood risk areas, as mortgage lenders will only offer loans on properties which have buildings insurance.

“Also, homes built since 2009 are not covered – the ABI says this is designed, “to avoid incentivising unwise building in flood risk areas”.

“In the Government’s consultation paper of November 2013 they confirmed that the proposed eligibility criteria will not include businesses and will only apply to properties occupied by the insurance policyholder or their immediate family. This means that as it is the landlord’s responsibility to insure their rental property they would be the policyholder and not the tenant. Buy to Let landlords would therefore not be eligible for the new ‘Flood Re’ scheme. My advice to landlords is to buy property in areas of low flood risk by checking the Environment Agency’s detailed map of the UK which highlights areas at risk of flooding in each region.”

Jenny Jervis, Marketing Manager at Endsleigh, says that higher premiums are already affecting householders. “The combination of recent severe flooding and insurers ability to use advanced mapping techniques to predict areas likely to be affected by flood, means that householders in high risk areas have found themselves with increasing premiums, large excesses and, in some cases, no flood cover at all.”

“The Flood Re scheme works by insurers passing the flood risk from homes considered to be at a high risk into a shared fund. Premiums for the flood risk will be calculated based on the council tax banding up to a maximum limit depending on the band. Homeowners in low flood risk areas will also be required to contribute – this is anticipated to equate to a levy of£10.50an annual household premiums. In the event of the fund being insufficient to deal with a ‘catastrophic’ flood event, the Government will step in as the insurer of last resort.

“Flood Re is designed to provide support to those who need it most and will cover homes only. Homes in the highest council tax band and homes built after 01 January 2009 will not be covered. The scheme also currently excludes small businesses, private rental properties, mixed use properties, people who work from home and most leasehold properties. This means that, even with the provisions set out in Flood Re, landlords may still find it difficult to obtain affordable flood cover in flood prone areas.”

Flood Re will be incorporated within the Water Bill and is currently passing through the House of Lords with the intention for all the elements to be agreed and formalised by summer 2015, however, with the controversy surrounding the whole scheme, it is highly possible that a final agreement will take a little longer.

May 18, 2014

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