Flood insurance: what you need to know

There are changes on the way for flood insurance, with plans to introduce a new scheme for high-risk properties within the next couple of years. But what are these changes and who will they affect?

The UK is one of the few countries where flood cover comes as standard with home-insurance policies. But someone who has a high chance of needing to make a claim will be charged more for a policy.

At the moment, all households that already have policies in place are guaranteed continuing flood cover. The guarantee comes as part of a voluntary agreement drawn up between the insurance industry and the government in 2000.

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But this agreement - called the Flood Insurance Statement of Principles - was due to end in June this year, potentially leaving hundreds of thousands of households at risk of losing their cover. Insurers would no longer have been obliged to renew their customers' policies.
Negotiations between the government and the insurance industry went right to the wire, until an agreement was reached over a new plan. Insurers have agreed to continue operating under the Statement of Principles until the summer of 2015, when it is expected that a new proposed scheme - called Flood Re - will kick in.

What was wrong with the old plan?

The Statement of Principles was always intended to be a temporary measure and it has restricted customer choice, as insurers have been committed to providing continuing cover only to their existing customers. They are free to reject applications from new customers.

Malcolm Tarling, spokesperson for the Association of British Insurers (ABI), says: "It also does not guarantee affordable flood premiums or manageable excesses, and an increasing number of people are beginning to struggle to afford flood insurance.

"The government and others agreed with us that the previous agreement had become unsustainable and that a new approach was needed to safeguard affordable and widely available flood insurance in the UK."

How will the new scheme work?

Flood Re will provide a fund for high-risk homeowners who might otherwise struggle to get affordable flood insurance, with cover capped at a set price.

If your insurer classifies your home as high-risk, it will put the flooding portion of your premiums into an industry-wide standalone fund, with your flood premiums capped.

The cap will be based on your council-tax band, starting at a maximum of £210 a year in Bands A and B and rising to £540 a year in Band G. The fund will be used solely to pay flooding claims.

What this means, in effect, is that the entire insurance industry will be pooling their high-risk household customers into a dedicated flood insurance fund.

It will not be without its knock-on costs. The ABI estimates each home-insurance policy will be hit with a £10.50 a year levy to help fund the scheme. However, the industry points out there is already an indirect levy applied to low-risk properties, because home insurance (as with all insurance schemes) works only when low- risk policies subsidise higher-risk customers.

Insurance companies have welcomed the development and pledged to work with the government as the details of Flood Re are thrashed out.

Peter Ketteringham, household underwriter at Aviva, says: "We are pleased there is now a framework in place to provide affordable and widely available insurance to help those most at risk of flooding. We will continue to work with the industry and government on finalising the details of the new not-for-profit insurance pool."

Will all floods be covered by the new scheme?

Pretty much, yes. The experts have devised a scheme that will fully cover losses from flooding in at least 199 years in every 200. The ABI is confident that Flood Re will also cover any once-in-200-years incident. But should losses prove to be technically "catastrophic", it is likely the government would step in.

To put such a huge event into context, the flooding that hit the UK in 2007 was deemed to be the biggest peacetime civil emergency since the Second World War - and yet flooding would need to be six times as severe as that to reach the level that proved beyond the scope of Flood Re. Short of people needing to build arks to survive, the scheme should cover all eventualities.

Will there be any exceptions under the new scheme

A few. In England, homes in the highest council-tax band - Band H - will not be covered, and nor will equivalent homes in Scotland, Wales and Northern Ireland. Owners of properties built since 2009 also won't be covered. However, these people are also not protected under the current Statement of Principles. It's all part of an effort to avoid rewarding developments in flood-risk areas.

I'm not at risk of flooding, so why should I care?

In the past, high-risk flooding was something associated with coastal populations and people who lived in low-lying areas. But whether you are a climate-change believer or a sceptic, there's no denying flooding has become a much wider problem over the past few years.

"Better information now available shows that many people are potentially at flood risk - from flash flooding, for instance - and not just people living near a river or the sea," says Malcolm Tarling from the Association of British Insurers.

Places such as the Severn Valley and Hull might suffer more than most with floods, but problems with surface water can strike anywhere, and there is no such thing as a risk-free property any more.

Moreover, if flood insurance becomes prohibitively expensive, it could have serious effects on the property market as high-risk households struggle to qualify for mortgages.The effects of any subsequent housing market problems would be felt way beyond the confines of households in flood-risk areas.