Insurance provides peace of mind. We buy insurance to protect us against the cost of something going wrong. If our car is damaged in an accident, we know an insurer will pick up the cost of repairs. We buy travel insurance to pay for our medical treatment if we fall ill on holiday. But we also know that the peace of mind comes at a price and, as young drivers know, the insurance premiums we pay vary depending on risk.
The same principle applies to flood insurance where we have seen premiums rise because of a growing concern about the cost of flood repairs and the increased frequency and severity of flooding. But higher premiums have priced flood insurance beyond the reach of some families; so peace of mind has been replaced by crossing your fingers and hoping that it doesn’t rain too heavily. The Government and the insurance industry felt that that was wrong and have come up with an innovative solution to improve the affordability of flood insurance.
So they set up Flood Re to help tackle the rising cost of flood insurance. When it is launched in April 2016, Flood Re will cover the cost of flood damage to the highest risk properties in return for a premium paid by insurers. Normally, this would be based on the estimated cost of repairing the damage to a home if there was a flood, but instead Flood Re will charge a fixed premium based on council tax band. For the highest risk properties, (about 2 in every 100 homes) this would be lower than the usual premium. To cover the shortfall between the estimated cost of flood damage and the new, lower premiums, insurers will pay Flood Re a levy of £180m.
Although insurers will still be responsible for deciding how much to charge their customers, all other things being equal, insurance for homes at the highest risk of flooding should be cheaper, meaning that more and more people should benefit from the peace of mind that insurance offers. The aim is that over time, as flood defences improve, the cost of flood insurance will fall and Flood Re will no longer be necessary.
In the face of rising premiums for flood cover, insurers faced a choice. They could work together to produce a radical new solution that would provide their customers with peace of mind at a reasonable cost or they could sit back and see customers cancel policies because they simply could not afford them. As Flood Re demonstrates, to build trust businesses have to show an appetite to be creative to get the best outcome for every customer.