Flood Re insurance scheme 'needlessly expensive'

A £180m tax on home insurance to subside the premiums of flood-prone households is poor value for money and badly designed, according to the government’s official climate change advisers.

The Flood Re scheme, designed by the government and Association of British Insurers, will cost three times more than the benefits it will bring, the Committee on Climate Change (CCC) warned on Thursday. It also said the scheme does little to encourage homeowners in flood risk areas to protect their homes, therefore only postponing the problem of dealing with increasing flooding.

The Environment Agency predicts more homes will be at high risk of flooding in coming decades, even in the best case scenario. This rising risk is the greatest impact of climate change on the UK, according to the government’s own scientists. 

However, the coalition government has cut overall flood defense spending, despite injecting emergency funds after major floods in 2012 and 2014. The end of an earlier agreement with insurers to provide universal and affordable insurance in return for rising government investment in deference has been extended while Flood Re is being set up.

Professor Lord John Krebs, who leads the CCC’s work on adapting to global warming, wrote to Brendan McCafferty, the chief executive of Flood Re. He warned: “Flood Re is set to subsidize many hundreds of thousands of households more than the estimated number that might struggle to afford cover in the free market. This makes Flood Re needlessly expensive and renders the costs three time the economic benefits.”

Flood Re is set to subsidies flood insurance for 500,000 homes but only 200,000 would find it hard to get affordable insurance, said Krebs, quoting insurance industry data.

Krebs also warned that including the most expensive homes – those in band H for council tax – was a “retrograde step”. He added that because Flood Re would pay out all claims in full, there was no risk to the homeowner or their insurance company, leading to a “risk that claim costs will spiral”.

A spokeswoman for Flood Re 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.”

She said the scheme could save the government billions of pounds: “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.”

A spokeswoman for the Department of Environment, Food and Rural Affairs said: “We urge people to protect their properties from the risk of flooding. Flood Re aims to protect people in the highest flood risk areas from spiraling insurance premiums but, crucially, not at the expense of other householders.