Flood Re reinsurance regulations move forwards

The House of Lords has approved draft regulations that will enable the implementation of the flood reinsurance scheme Flood Re

Bernadette Ballantyne
03 November 2015

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Two draft statutory instruments that will outline technical aspects of the flood reinsurance scheme and designate Flood Re as the scheme administrator, were approved by the House of Lords following debate of the regulations last week.

The Draft Flood Reinsurance (Scheme Funding and Administration) Regulations 2015 set out the framework within which Flood Re will operate and how the levy will be calculated. The Draft Flood Reinsurance (Scheme and Scheme Administrator Designation) Regulations 2015 designate the scheme and administrator.

Introduced by Defra in June 2013, Flood Re is intended to provide cover to households at high flood risk over a 25 year period as part of a gradual transition towards more risk-reflective prices. These high risk homes will be covered by insurance companies who will themselves reinsure the flood element of the insurance through Flood Re. The cost of this will be set according to the council tax banding of properties with the flood insurance element for Band C properties expecting to cost around £246 per annum.

In the event of a claim insurers will be able to turn to the ‘not-for-profit’ Flood Re fund, which is financed through both flood insurance premiums and a levy on home insurance. The total amount of primary levy to come from insurers will be £180M. The Association of British Insurers, which is implementing the scheme, estimates that without it 300,000 to 500,000 homes would struggle to get insurance in the face of rising flood risk.

In preparation for the launch of the scheme in April 2016 the team behind Flood Re say they are working hard to put the systems and process in place to ensure the scheme works well. This includes submitting a detailed business plan to the UK’s financial regulators – the Prudential Regulatory Authority (PRA) and Financial Conduct Authority (FCA); starting the “on-boarding” process where insurers, brokers and software houses were invited to register and begin testing their systems and processes, and putting a management team in place. This includes the most recent appointment of chief risk officer Michael Bartholomeusz, who will report to chief executive officer Brendan McCafferty.

To date 50 participants have registered for the Flood Re “on-boarding” which is a three step process of registration, testing and authorisation.

One of the key issues debated as the draft legislation passed through the House of Commons in summer was the future transition to risk-reflective pricing. “Members have shown considerable interest in how Flood Re will manage the transition to risk-reflective prices over the medium to long term. Flood Re will therefore publish a transition plan three months after the regulations come into force,” said Rory Stewart, parliamentary undersecretary of state at the Department for Environment, Food and Rural Affairs (Defra) during the House of Commons debate on the regulations in September. “That will be the first statement of how the transition will operate. It may then give indications of how prices will evolve during the life of Flood Re in order to encourage people to move towards risk-reflective pricing,” he said.

Earlier this year experts urged Flood Re to do more to incentivise homeowners to manage and lower their flood risk. Stewart said this would be considered in the transition plan. “Flood Re will consider the role of incentives for policyholders to manage their flood risk in its transition plan, and it has been agreed with Flood Re that it will do this within two years of becoming fully operational, but the focus now has to be set on getting this complex scheme right,” he said.