On 27 June, the UK government and the Association of British Insurers (ABI) announced they had reached a memorandum of understanding (MOU) on developing a not-for-profit scheme (Flood Re) by summer 2015 to ensure flood insurance remains available to policyholders in flood-exposed regions of the UK. Moody's consider these developments to be credit positive for UK property and casualty (P&C) insurers.
Flood Re will supersede the Statement of Principles on the Provision of Flood Insurance (SoP), which expired on 30 June. It will provide certainty for insurers on their potential exposure to flood-prone UK regions by giving insurers the option to cede their domestic flood risk to Flood Re. In addition, the agreement ensures that most property owners in flood-exposed areas can access insurance coverage at capped prices. Premiums pooled into Flood Re would then pay relevant flood-related claims. Until Flood Re is fully operational, insurers will continue to offer flood protection as a standard part of buildings and contents insurance under the terms of the SoP.
Flood Re will be run and financed by insurers on a not-for-profit basis, charging member firms aggregate annual fees of £180 million, based on their UK home insurance market share. This is the equivalent of approximately £10.50 per household policy. This levy will be fixed for five years and then renegotiated at regular intervals over what the MOU expects will be the 20-25 years duration of Flood Re.
Moody's expect Flood Re to be capitalised to fully meet losses at the 99.5% value-at-risk level, an event 6x the largest recent UK flood event, which was in 2007. In the event of losses exceeding this level, the UK government will provide a backstop for further losses.
These developments will lead to a number of credit positive steps for UK P&C. Insurers can continue writing coverage in flood-prone areas, but can cap their potential losses to a severe UK flood event by ceding such risks to Flood Re. The ABI estimates that approximately 500,000 flood policies per year will be ceded to Flood Re, out of 5.8 million UK properties that the UK Department for Environment, Food and Rural Affairs says are at some risk of flooding and which may otherwise have been refused coverage. In addition, the UK government will provide letters of comfort to the industry confirming its long-term commitment to spending on flood risk management, which may ultimately reduce the severity or frequency of future flood events.
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