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  • February 2015
02

Flood Re poor value for money, says CCC

Open-access content Monday 9th February 2015 — updated 5.13pm, Wednesday 29th April 2020

The government’s flood reinsurance scheme, Flood Re, has been criticised as “needlessly expensive”, by Lord John Krebs, chairman of the Committee on Climate Change (CCC)’s adaptation sub-committee.

2

He said Flood Re would only charge householders a "small excess" and compensate them in full for all claims from the scheme's pool. The CCC suggested that as a result, the insurer issuing the policy would not have a direct interest in limiting the cost of claims.

In a letter to Flood Re CEO Brendan McCafferty, Lord Krebs said he feared there might be a risk that "claim costs may spiral" and that a small element of risk retention by insurers "would help preserve incentives for claim costs to be managed".

The CCC said an increase in the estimated number of households covered by the scheme - from 200,000 to 500,000 - would make Flood Re  "needlessly expensive".  Lord Krebs said the inclusion of Band H homes "would be a retrograde step" and there is a "strong case to narrow the scheme at the earliest opportunity".

Under the scheme all home insurance policyholders will pay a levy of around £10.50 a year into a pot, and this coupled with the capped premiums flood-risk householders will pay, will generate an estimated income of £180m per year. 

Lord Krebs said the current configuration of Flood Re meant costs were "higher than necessary at the expense of other household's insurance bills". He added: "Value for money is poor."

He stressed that reducing flood risk and helping high-risk households to be more resilient should be the priorities of Flood Re. 

Lord Krebs said: "Helping policyholders to avoid flood damage will reduce the levy income needed over Flood Re's lifetime and improve value for money."

In response to the letter McCafferty said:  "Measuring the benefits of Flood Re in terms of economic return does not take account of the significant benefits that it will enable for hundreds of thousands of customers across the UK who, in the absence of Flood Re, would face the awful prospect of suffering flooding without the ability to access affordable flood cover.

"Flood Re is being built by the insurance industry and, without it, the cost of helping people rebuild their lives after a flood would either fall to government or to the victims themselves. Recent floods have proven that this is best owned and managed by the insurance industry, and Flood Re allows this to happen, without government and taxpayers having to bear the potential risk of flooding, which is measured in billions of pounds."

Last month, the European Commission approved Flood Re.

This article appeared in our February 2015 issue of The Actuary.
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