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The proposed changes to Flood Insurance: FAQs for lenders

Insurance against flooding is critically important to protect households from the devastating impacts of heavy rainfall, surface water flooding or tidal surges. Flooding can cause tens of thousands of pounds of damage and mean having to live elsewhere for months while properties are dried out and can be refurbished. Suffering a flood is distressing enough even with insurance in place. Without it households can also find themselves in severe and lasting financial hardship.

Flood insurance has been widely available up to now as a result of long standing voluntary agreements in England, Wales, Scotland and Northern Ireland with members of the Association of British Insurers (ABI). These agreements, called the ‘Statement of Principles’ expired at the end of June and the industry along with Department of Environment, Food and Rural Affairs (Defra) have been working hard with the industry on future arrangements.

What are the Water Bill and Flood Re?

The Water Bill will bring forward measures to address the availability and affordability of insurance for those households at high flood risk and ensure a smooth transition to the free market over the longer term. ‘Flood Re’ would effectively limit the most that high-risk households should have to pay for the flood component of their home insurance. The maximum amounts would differ by council tax band so that those in smaller properties do not have to pay as much for flood insurance as those in larger houses. The approach means that people could know the maximum they might be asked to pay and would no longer need to be worried about not finding affordable insurance.

What’s covered by flood re?

Approximately 500,000 properties (about 1-2% of the total number of residential households in Great Britain) at the greatest risk of flooding will be covered by Flood Re:

  1. Properties insured in the name of an individual or in a trust for an individual;
  2. Properties have a council tax band
  3. Properties are used for residential purposes
  4. Properties have an individual premium; and
  5. Properties are occupied by the policyholder or their immediate family.

What’s not covered?

Properties not covered by the proposals currently include:

  • Residential properties used as a business;
  • commercially-insured privately rented homes (including holiday homes);
  • leasehold properties that are commercially insured (not in the name of an individual);
  • all properties built since January 2009; and
  • properties in council tax band H.

What does this mean to lenders risks?

  • Customers may be in breach of mortgage terms and conditions if uninsured at any time
  • The potential for borrower default or arrears through financial stress of having to repair uninsured damage
  • The potential risk to the lender of repossessing a flood-damaged property (the loss of loan security value; repair costs and impact on re-sale margin)
  • The possibility that regulators might require lenders to provide additional capital cover for uninsured mortgaged properties or those at risk in rising insurance cover

What’s the solution?

  • Lenders need to identify those mortgages with a propensity to flood and prioritise accordingly
  • This will involve combining lenders own data with Ordnance Survey data and a number of other reference datasets sourced from public sector bodies including flood risk data sets and property value data sets to provide a priority list for the lender.

Contact us for more information about how we can help identify the properties at risk within your portfolio.

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