The European Commission has approved the UK Flood reinsurance scheme, known as Flood Re.
Flood Re would be the only flood reinsurer to benefit from being partially funded by an industry-wide levy. The Commission said this might confer an economic advantage to the pool over its competitors and therefore "constitute state aid within the meaning of EU rules".
However, the Commission concluded the scheme was compatible with EU rules because such insurance cover might not be sufficiently available in the private market. The Commission felt that the scheme would remedy market failure without affecting competition.
Margrethe Vestager, commissioner in charge of the competition policy, said: "Today's decision ensures that insurance coverage against high flood risks is available at affordable prices to those UK citizens who need it most, because they live in regions vulnerable to flooding. It is a great illustration of how the Commission and member states can work together to design effective aid measures that contribute to important public policy goals."
Flood Re is an agreement between UK insurers and the government to develop a not-for-profit flood risk reinsurance pool, which will be run and financed by insurers.
The UK notified the Commission of its plans to set up the scheme in November 2014.
The aim of Flood Re is to ensure insurance is available for high-flood-risk households at affordable prices.
Last year, the Association of British Insurers was accused of "misleading" claims about the scope of Flood Re. In December, the government finally agreed on the criteria for properties eligible for Flood Re.