Homeowners to pay extra to cover flood-risk homes
With just days to go before the expiry of the government's agreement with the insurance industry that people in flood-risk areas can insure their homes, insurers are optimistic that a new deal will be reached. But the AA has warned it could cost each homeowner in Briton an extra £10 a year.
Insurers agreed a 'statement of principles' with the government in 2008 to renew cover for flood victims, usually at a high premium, with high excesses. This agreement was due to expire on 30 June 2013, but has been extended for a month – when it eventually expires, householders face being refused cover unless the government and the industry come to a new agreement.
The Association of British Insurers (ABI) had proposed a scheme (known as the 'Flood Re' scheme) to ensure the 200,000+ households affected by flooding will be able to renew their policies this year. The proposal meant insurers would add a levy to every home policy in the UK to help pay for the cost of insuring flood-risk properties.
But it required the government to allow insurers to use a temporary overdraft-type facility that would be used to pay claims in the early years, before the flood fund had built up enough reserves.
The government entered into talks on the proposal, but those talks broke down in November 2012. There has been little progress made since then, but the AA said today it remains "optimistic" that a deal will be reached.
Simon Douglas, director of AA Insurance, said he hoped a deal would be struck in time for an announcement to be made in the government's spending review – due on 26 June 2013.
"Even if a solution is reached on 26 June, there will need to be a transitional period while legislation is put in place, all of which takes time," he said.
"The ABI's ‘Flood Re' proposal is the best way forward although it is likely to be adapted to reduce the Treasury requirement to underwrite whatever agreement is drawn up, possibly through the reinsurance industry.
"Even so, it will rely on all home owners being willing to fund the potential flood costs of others. This would be reflected in the premiums they pay – possibly by around £10 per policy.
"However, it is worth pointing out that many homes that were flooded last year had no previous history of flooding - so no-one is immune from that threat."
The UK's home insurance policies are unique in Europe because they automatically include flood cover. Elsewhere, this cover is bought separately and is either partly or wholly underwritten by the government. It means that in the event of major flooding, an emergency relief fund is released that is paid for through the tax system.
At the tine of the recent flooding in Germany, only 20% of properties (including commercial property) had flood insurance, but the government will meet the bulk of the cost of repairs.
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.
Association of British Insurers
Established in 1985, the ABI is the trade body for UK insurance companies. It has more than 400 member companies that provide around 90% of domestic insurance services sold in the UK. The ABI speaks out on issues of common interest and acts as an advocate for high standards of customer service in the insurance industry. The ABI is funded by the subscriptions of member companies.