In response to the announcement made by the UK Government and the Association of British Insurers on Flood Re last week, experts from Willis Re and the Willis Research Network made the following observations:
Robert Rogers, Head of UK Reinsurance at Willis Re, commented: “Willis Re welcomes the ABI and Government’s issue of a memorandum of understanding to establish Flood Re in summer 2015. The proposed pool will operate as ‘not-for-profit’. It will be funded from a levy on all households which will effectively cap flood insurance premiums keeping them affordable for all. This effectively subsidises the flood claims from households that insurers deem as high risk and do not wish to retain on their own balance sheets.”
Based on a request from Willis for clarification from the UK government, Willis Re understands that should the capital of the pool be insufficient to pay claims in the start-up years, the Government, Flood Re and the insurance industry would together discuss how best to meet the difference.
According to the UK’s Department for Environment, Food and Rural Affairs (Defra): “If a catastrophic flood were to occur, Flood Re will pay out on reinsurance claims up to the 1:200 level (around £2.5bn per year). If this level were exceeded, the Government, Flood Re and the insurance industry would together discuss how best to help households insured via Flood Re. The Government has accepted no formal liability in this scenario. For example the combination of Flood Re’s reinsurance contract and cash reserves may be sufficient to meet any and all such claims. There would only be a 1 in 200 chance each year of this scenario coming about.”
Rogers continued: “The key point is that flood coverage will be widely available and affordable for the vast majority of households. Willis Re also believes that the proposed pool will not impose a significant administrative burden on insurance businesses nor undermine the commercial environment, which will therefore continue to compete to best underwrite the flood risk.”
Tim Edwards, Executive Director of UK Catastrophe Modelling at Willis Re, commented: “Many of our UK insurance clients have invested significantly in technology to underwrite and manage flood risk. Post the summer of 2015 the market place will continue to be competitive and investments in flood underwriting will continue to be valuable in helping clients manage their flood risk.
“Willis Re understands that upon implementation there will be some uncertainty around which policies insurers may wish to retain or pass on to Flood Re. Willis Re clients will continue to benefit from access to SpatialKey, an on-line geo-visualisation platform, together with flood hazard datasets to ensure accurate risk pricing. These assist in flood risk assessment and in managing responses post loss. Willis Re is also working with clients to assess the potential impact of a reduction in aggregate exposures on their reinsurance costs along with the likely impact on capital.”
Rowan Douglas, Chairman of the Willis Research Network, commented: “The announcement on Flood Re is very welcome news for homeowners, the Government and the insurance industry. Once again, the UK has shown leadership in combining private sector insurance with sensible public policy to deliver economic and sustainable solutions to manage, reduce and share flood risk across the country.”