New moves on insurance against flooding

This article by Andrew Bibby, in a slightly different form, was first published in Choice, 2014

Flood water, it seemed, was everywhere last winter: invading the Somerset levels, encroaching into towns in the Thames valley, sweeping across the main line railway at Dawlish in Devon , and certainly dominating the television news schedules. Day after day we watched the heartbreaking scenes caused by our increasingly unpredictable weather.

It wasn't only last winter. Floods have, unfortunately, been an all-too-common story over the past few years. The risks of further flooding are high: the government says that, across Britain , 5.8 million homes (nearly one in every six) are at some danger of flooding. And that's not counting the homes at risk from coastal erosion.

This is a problem which affects us all, whether we live in a high flood risk or not. The question is the simple one of who's responsible for paying for the damage. Is it the government – and does that mean we have to be prepared to meet the costs through our taxes? Should insurance companies pick up the pieces? Or should we just shrug and expect the individual homeowners affected to cope with their misfortunes by themselves?

The government and the insurers have been actively discussing this question recently and have come up with a deal between them. It's called the Flood Reinsurance Scheme, or Flood Re for short, and it is coming into effect next year. It should mean that most homeowners in high-risk areas can continue to get insurance against floods without necessarily paying an arm and a leg. But it's also only a transitional arrangement.

Flood Re works by imposing a levy on all insurance companies who offer home insurance on buildings and their contents, in proportion to their share of the overall market. The levy will go to a not-for-profit agency which will buy specialist reinsurance to top up the protection for homes that would otherwise be hard to insure.

Although Flood Re will impose a levy on insurers, in practice this cost will be passed on to the customer. The industry reckons that, if you have a combined buildings and contents policy, the average share you will have to pay will amount to £10.50. Insurers claim that this isn't new money – they say that there is in practice already an element of cross-subsidy in the way policies are priced, so theoretically premiums shouldn't go up. But we'll only know what happens when the scheme comes in next year.

There are also some exceptions to Flood Re. Houses classified in the top Council Tax bracket (Band H) are excluded altogether, which may be bad news if you're lucky enough to live in a mansion beside the Thames . Perhaps more significantly, properties built after January 2009 are also excluded. The logic here is that new houses – under the government's current planning policy - shouldn't be being built in high-risk flood areas at all. But the 2009 cut-off is controversial: the British Insurance Brokers Association, for example, wanted the chosen date to be 2013. And small businesses are not protected from Flood Re: independent shop-keepers, who have suffered disproportionately from recent flooding, have no guarantee that they will be able to afford, or even find, insurance against future flood damage.

It is generally considered that Flood Re will be offering help to about 350,000-500,000 homeowners who might otherwise be in exactly the situation as these small businesspeople. But this doesn't mean that every insurer is obliged to offer cover for every house. The theory with Flood Re is that – with the risk of claims specifically related to flooding being taken out of the equation – the ordinary mechanisms of the market can be left to operate. Insurers will weigh up in the normal way how much they want to charge you, and you will be at liberty to shop around.

That's the theory. Flood Re's initial levy is being set for the next five years, but the government has got a stick in reserve if the scheme clearly doesn't work. This is the so-called Flood Insurance Obligation, which would compel insurers to share cover proportionately between them for those houses affected by flood risk.

Flood Re simply covers the risk of river or tidal flooding and doesn't extend to other natural or man-made disasters. There's no particular protection if your property, let's say, is bang up against a major fire hazard such as an oil refinery. And you'll also find that Flood Re doesn't mean that there won't be an excess (the first part of a claim which isn't met). The standard excess under Flood Re will be in the range of £250-£500, but again the idea is that market competition will determine what precise deals you're offered.

Government ministers have been quick to claim that people no longer need to live in fear of being uninsurable. But, longer-term, the position is much more uncertain. Flood Re is intended to last no more than 25 years, and during that time there is the intention that insurance will move towards what the government calls “risk-reflective prices”. In other words, in the long term the element of cross-subsidisation will disappear. if you live in a home in a high risk area, you should prepare eventually to pay more, perhaps a lot more for your insurance, or accept that you won't be able to get flood insurance at all.

What the government and the insurance industry hope will happen is that householders will take advantage of the transition to begin taking their own flood amelioration steps: such things as buying flood-resistant barriers for their front doors, perhaps. There may be insurance discounts available to reward measures like this, in the same way as some insurers charge less if you have an intruder alarm fitted. Under Floor Re, insurers will be under a duty to advise you if you are included in the at-risk category for flooding.

At the crudest level, there is also the suggestion that in the long term the market will sort things out: there may be a ‘rebalancing' of house values, so that houses in flood-risk areas will begin to be less popular and to sell for less.

What's this all mean when it comes to renewing your buildings or contents insurance next year? Up to now, homeowners with flood-risk homes have had a certain reassurance from the fact that their existing insurers have committed until Flood Re comes in to continuing to offer cover. After Flood Re, you may have more opportunity to shop around and to look for better bargains. On the other hand, you can't necessarily assume that everyone will want to offer you a deal. Particularly if you are in an area which has flooded recently or is known to be at high risk, it will make good sense to consider buying cover through a local insurance broker. They are likely to have the specialist knowledge of exactly which companies are offering competitive products.

Five things to know if you're worried about flooding.

1. Is my property at risk? The Environment Agency makes available a series of maps online which show areas of Britain at particular danger from flooding. Be aware that the maps, whilst useful, are somewhat broad-brush (many insurers pay to have access to more detailed commercial maps). The EA's flood map is at http://tinyurl.com/q78ges7.

2. How high is my river? The Environment Agency ( England and Wales ) makes real-time information about river levels available at http://tinyurl.com/k6rsqs3. The information is based on a series of monitoring stations on the banks of rivers. Usefully, you're also given information on the highest ever readings at each station – worth a look, perhaps, if you're thinking of buying a house nearby.

3. How do I get flood warnings? The Environment Agency has a Floodline telephone service on 0845 988 1188. You can register your property to receive free alerts by phone if flooding is possible; registration is either by phone or online at http://tinyurl.com/7z9xq7l. And flood warnings and alerts in force are publicised online at http://tinyurl.com/nx5es7t.

4. What if I'm more worried about the sea? There are maps on sea levels and coastal erosion available at http://tinyurl.com/6cqgs6. (You'll also find this page gives access to a range of other data, including the quality of bathing water at beaches).

5. What about flooding in Scotland ? Scotland has its own body, the Scottish Environmental Protection Agency (http://www.sepa.org.uk/flooding.aspx). You can find flood risk maps at its website and (just as south of the border) you can sign up for a free flood alert phone call. (In Northern Ireland flood maps are available at http://www.dardni.gov.uk/index/rivers/flood-maps-ni.htm).