The UK’s flood reinsurance scheme has seen a key measure of its financial health exceed five times its required level after a quiet year for claims, as the government consults on whether to deploy some of the programme’s funds on resilience measures.
Flood Re was launched five years ago as a public-private initiative to reduce insurance costs for people in flood-prone areas. It is partly funded by an annual levy of £180m on home insurers. Flood Re also receives premiums from consumer-facing insurers for flood risks that they pass on to the scheme.
Annual results for the year to March to be published this week show that the reinsurer booked just £8m of claims in what was a relatively flood-free period, meaning that the bulk of the levy and premiums were piled on to the scheme’s already-healthy capital position.
That pushed its operational capital ratio — a smoothed measure of its regulatory capital as a proportion of what it requires through the year — to 521 per cent. Big non-public reinsurance groups typically have solvency ratios of about 200-250 per cent.
“We have to be adequately capitalised to protect against big catastrophe events,” said Flood Re chief executive Andy Bord. “We know that climate change will make extreme weather events more frequent and more extreme,” he added, citing the heatwave seen in recent weeks in the Pacific Northwest and Canada.
The government estimates that flooding causes £1bn worth of damage each year. It plans to invest £5bn over the next six years on coastal and flood defences.
The Flood Re results come as the government awaits responses on changes it has suggested to the scheme’s set-up, following proposals made by the scheme two years ago.
In February, ministers issued a consultation on whether Flood Re should offer premium discounts for homes that have prevention measures in place; whether claim payouts could include extra funding to strengthen homes against flooding; and whether the scheme could spend part of its capital surplus on wider resilience activities.
The British Insurance Brokers’ Association, a lobby group, said it “supports any measure which will enable more properties to implement flood prevention and resilience measures to mitigate the effects of flooding”.
In its annual report, Flood Re said the resilience discounts and the “build back better” proposal would only work with the co-operation of primary insurers.
The government also said it was “important that the levy is now made more flexible so that it can better reflect the true income needs of the scheme”. It is considering reducing to three years from the current five the period for which each levy runs.
The levy will remain at £180m in the current financial year, but Flood Re expects it will fall to £135m after that, subject to government approval.
The Flood Re scheme had done its job, Bord said, protecting people in properties most prone to flooding. Before it was established, just 9 per cent of those with a prior flood claim could get two or more insurance quotes, now 94 per cent can get five or more.
Overall, more than 218,000 policies were backed by the scheme last year, up 11 per cent on the previous 12 months.