Deal reached on flood insurance for at-risk homes

FEARS that thousands of Scots would be left with uninsurable and unsellable homes have been allayed after a key deal was struck over insurance cover for flood risk properties.

The deal is good news for those buying or renovating homes in at-risk areas. Picture: Neil Hanna

A proposal aimed at ensuring that homes in flood risk areas are protected against huge increases in home insurance premiums was issued just as the existing arrangement comes to an end. However, the new agreement will come at a cost of at least £10 a year in premiums for all home insurance policyholders.

A long-standing arrangement in which insurers guarantee affordable cover for flood risk homes in exchange for government investment in flood defences – known as the “statement of principles” – expires this weekend, but months of negotiations over replacing or extending it had appeared fruitless.

While insurers had agreed to extend affordable cover for another month, Scots with homes in flood risk areas were at risk of being priced out of home insurance.

There are 125,000 properties in Scotland at risk of flooding, according to the Scottish Environmental Protection Agency, including one in 22 residential properties.

Around 5,000 homes north of the Border would struggle to secure insurance once the statement of principles ended, the Association of British Insurers (ABI) estimated.

Those unable to afford home insurance also face a struggle to claim mortgage finance, while the cost of insuring some homes would have made them all but impossible to sell.

But insurers and the government have published a memorandum of understanding setting out terms that would allow home insurance costs to be capped for people in flood risk areas. The arrangement, dubbed Flood Re, will be run by insurers on a not-for-profit basis to cover the cost of flooding claims.

Premiums for homes in affected areas will be linked to council tax bands, up to a maximum limit, with the shortfall bridged by an insurance industry pool into which firms will pay around £180 million a year. It’s expected that this will cost all households £10.50 in extra premiums a year.

The new system is unlikely to be in place for at least two years, although insurers have pledged to meet their commitments under the current statement of principles until Flood Re is established.

The news was described by Clare Francis of Moneysupermarket.com as a “huge relief” to people living in areas at risk of flooding.

“But this decision was taken to the wire with many homeowners fearing that they would find themselves uninsurable as the existing agreement was due to end on 31 July,” she said.

“The extreme weather in recent years has resulted in many homes having been affected by flooding for the first time, and while this has obviously cost insurers a huge amount in payouts, there was a fear that thousands of homeowners would be left unable to afford insurance for their homes.”

There are still concerns over the details of the agreement, however. Simon Douglas, director of AA insurance, pointed out that the government wasn’t obliged to step in if there was a “serious once-in-200 year flood disaster”. He also suggested that deal would cost households more than the £10.50 a year in extra premiums.

“Average premiums for high-risk properties are already over the amounts stated so reducing these must have an impact on premiums across the board,” said Douglas, who warned that the need for EC approval for the new legislation could lead to further delays.

And Otto Thoresen, director general of the ABI, added a note of caution, pointing out that issues still need to be overcome. “For Flood Re to be established successfully there needs to be an unprecedented level of partnership between government and industry. The hard work now begins for both sides if we are to make this vision a reality.”

• For more information: Is your home in a flood risk area? Find out on the Scottish Environment Protection Agency website at www.sepa.org.uk.