The encyclopedia · Finance & Accounting · Financial decision · 2016
Flood Re pooled Britain's flood risk so insurers could price it affordably
Britain's insurers fund a pool that reinsures flood risk at fixed premiums, caps excesses at £250 and cuts bills for about 350,000 homes.
Flood Re
the move
Before 2016, UK households in flood-risk areas often paid thousands of pounds extra for insurance, or could not get cover at all. In April 2016 Flood Re launched as an industry-wide reinsurance scheme.
Insurers can pass the flood-risk element of a home policy to Flood Re at a fixed premium based on the property's council-tax band; the pool also caps policy excesses at £250 per claim.
The pool is funded by those premiums plus an annual levy on all home insurers — about £180m at launch — so the cost is spread across every policyholder, roughly £10.50 extra on an average premium.
About 350,000 homes stood to benefit, and seventeen insurers joined at launch, with consumers never dealing with Flood Re directly.
why it works
- The levy spreads flood risk across every home policyholder, not just those at risk.
- Fixed council-tax-band premiums made high-risk cover predictable and affordable.
- The £250 excess cap removed the surprise costs that made cover feel worthless.
- Reinsurance let insurers write policies they previously refused.
what transfers
When one risk is unaffordable at a point in the market, pool it across the whole market: spreading the tail risk and capping the excess keeps cover available without a public subsidy.
what came after
Flood Re is designed to transition toward risk-reflective pricing as it matures; Parliament extended it beyond its original end date, and its structure is cited as a model for pooling other uninsurable tail risks.
references
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