Our Ask the Experts column is your chance to put industry figures on the spot. In this edition Kevin Paterson, managing director at Source Insurance answers your question.
How will flood response action in the insurance industry impact customers and insurance premiums?
The Chartered Insurance Institute’s New Generation Claims Group has published a report that calls for the creation of an agreed standard for validating the flood resilience of a property.
This would essentially create a certificate allowing homeowners to prove their property had undergone adaptations to improve its flood resilience, operating in a similar way to the energy performance certificate.
The theory is that a flood risk certificate would allow insurers to differentiate between risks more easily than under the current framework – fondly referred to as the postcode lottery by some. According to the CII group’s research, customers do not see any benefit in employing flood resilience measures as they don’t feel that insurers recognise these steps when it comes to calculating premiums.
The proposal has gained the support of many in the industry including the Chartered Institute of Loss Adjusters which views it as a positive step to help reducing a customer’s potential risk, lessening the potential impact of flooding and, potentially, meaning that they don’t pay more than they need for cover.
Given the uncertainty that still remains with the upcoming introduction of the new Flood Re scheme, such a certificate could act as a powerful incentive for homeowners in flood risk areas to take proactive steps to protect and adapt their property.
Flood Re scheme
As a reminder, the Statement of Principles that existed between government and insurers with regards to insurance for existing properties in flood areas expired in June 2013 and was replaced by a Memorandum of Understanding to continue pending implementation of Flood Re. This is essentially a reinsurance programme open to all home insurers for high risk domestic properties.
At the moment it is still unclear as to which risks insurers will cede to Flood Re and each insurer is free to decide which risks they do cede. Insurers will also be able to choose what premium they charge but will be expected to pass on the benefit of Flood Re to customers through lower premiums in high risk areas. Only properties built before 1 January 2009 can be ceded and while some limited business activity is acceptable for home insurance contracts where the owner is resident, properties in commercial ownership and/or paying business rates cannot be ceded.
Insurers will always consider anything that prevents loss to a customer’s property as a good thing, but don’t necessarily translate it into a reduced premium. There has been something of a precedent in the car insurance market whereby installing a security device or a tracker can be taken into account in the premium. Such devices have to be registered with the Association of British Insurers and have gone through an approval process – and therein lies the issue when it comes to flood resilience products. There is a whole range available and they usually only mitigate against certain types of flooding.
Clearly the introduction of a flood resilience certificate and its acceptance by insurers is not going to happen overnight, nor is it certain to deliver reduced premiums, however, the very fact that it is the insurers’ chartered body recommending its development is a positive step and could result in some relief for homeowners in high risk flood areas in the future.