Commission approves flood reinsurance scheme in England and Wales

29 Jan 2015 | by Caroline Sweeney

On 29 January, the Commission announced that it had concluded that the flood reinsurance scheme set up by sections 64ff of the Water Act 2014 is in line with EU State aid rules.  See http://europa.eu/rapid/press-release_IP-15-3884_en.htm.

The aim of the scheme is to ensure that owners of homes in England and Wales that are liable to flooding  have access to affordable buildings and contents insurance.  The scheme sets up an entity – to be known as Flood Re – that will have the duty to provide reinsurance to insurers for the flood risk element of buildings and contents insurance for all homes.  The amount that it charges for such reinsurance is to be set by reference to the council tax valuation of the home.  Insurers can then offer buildings and contents insurance to homeowners in vulnerable areas on the basis that they can obtain reinsurance at a set price against the flood risk element.  The scheme is to be funded by a compulsory levy paid by all insurers that offer buildings and contents insurance in England and Wales, with the amount paid by each insurer being proportional to the gross premiums received by the insurer on such policies.  The scheme administrator has power to raise additional levies, subject to Government approval.

The scheme is to last for 25 years (the relevant statutory provisions are subject to a “sunset clause” that automatically repeals them in 2039).  Flood Re is required to prepare transitional arrangements designed to move towards price-reflective insurance as homeowners and developers take steps to reduce vulnerability to flooding and to make homes more resilient against flood damage.

The Commission’s press release notes that the scheme is financed by the insurance industry.  But it nevertheless indicates that “Since Flood Re would be the only flood reinsurer benefitting from this levy, it could confer on it an economic advantage over its competitors and therefore constitute state aid within the meaning of EU rules.”  It is not therefore clear from the press release whether the Commission reached any concluded view on the question of whether there was aid.

In any event, the Commission concluded that (if there is aid) it is compatible with the common market.  It identified the lack of affordable home insurance in areas vulnerable to flooding as a market failure that the scheme would address.  The scheme is open on an equal basis to all insurers, minimising distortions of competition.  Finally, the Commission noted with approval the provisions designed to move the market slowly away from reliance on the scheme and towards risk-based insurance combined with measures to improve flood resilience.

The Flood Re scheme is of great importance to the insurance industry, housebuilders and to those with houses in areas vulnerable to flooding.  Critics will note that the cost of the scheme will be borne by those who live in homes not liable to flooding, as the levy is likely to be passed on in higher premiums.  But they will to some extent be reassured by the measures being taken to ensure that in the long run insurance premiums become risk-reflective.

George Peretz and Alan Bates have advised on State aid issues arising out of the Flood Re scheme.