Mortgages: climate change, flood and insurance of UK homes after 2039

The current situation and Flood Re

Flood Re is a re-insurance scheme, introduced in 2016 as part of the government’s efforts with insurance companies to cap flood risk insurance premiums for households at the greatest risk of flooding.

It is funded via a levy from all insurers offering home insurance policies. There is also a charge to the insurer per policy, relative to each property’s council tax band.

A not-for-profit scheme, financed and run by insurers, all UK household insurance providers must pay into a fund, which raises more than £100m a year. This cost is passed on to all domestic policyholders (you will see it noted on your insurance policy).

When customers buy an insurance policy, the insurer may pass the flood risk element to Flood Re for a fixed price, which is based on the property’s council tax band. If a flood-related claim is made, the insurer pays out and seeks reimbursement from Flood Re.

Flood Re allows householders to claim up to £10,000 to install property flood resilience measures after a flood under its Build Back Better scheme. The average flood damage claim is £30,000 according to estimates.

Flood Re was never intended to be a permanent solution to the lack of affordable flood insurance and the scheme is due to end in 2039, 25 years after it was launched.

The role of Flood Re

In the year to 31 March 2023, Flood Re covered more than 265,000 policies and that among policyholders who had previously made flood claims, four out of five had seen their premiums drop by more than 50%. It is estimated that 3.2m homes are at risk so it is perceived that that there is a significant need for insurance.

Out of the householders in areas of high risk of flooding, 99% were able to find quotes at least 15 insurers. This is compared to the era before Flood Re was introduced, when fewer than one in ten of householders in high-risk areas could get quotes from at least two insurers.

There is already likely to be a condition set by mortgage providers as part the lending that flood insurance must be in place if the property sits in an area prone to or is at risk of flooding. This is in the Mortgage Handbook used by most lenders.

With Flood Re in place until 2039, homeowners are able to insure their property, if the property was built before 2009.

Properties built after January 1, 2009, are not covered by the Flood Re scheme because the expectation was that developers would not build on land that was at risk from flooding. However, with a shortage of building space and climate change, the Environment Agency recognises that flood risk may also exist for new-build properties.

While a mortgage can span up to 40 years, the insurance policies that cover it are most likely annual contracts. That means there is a series of 12-month policies covering the property for the duration of mortgage – this obviously anticipates a continuity of insurance supply.

The basic facts are that many homes are at flood risk (and more are expected to be so with climate change) and there is a need for matching insurance terms with mortgage terms. As things stand, there is a likely to be a mismatch in both, unless the insurance market increases its risk appetite for this risk.

Internationally, there is no evidence that insurers wish to absorb increasing climate risks without significant increases in premium – so this is definitely a space to watch.

What happens after 2039?

When Flood Re expires, the idea is that insurers will offer policies that are based on the actual risk to a property, so called “risk-reflective pricing”.

Flood Re published its Transition Plan earlier in the summer, which looked at flood risk in the UK over the next 20 years and set out where the UK needs to be by the time Flood Re ends.

In the report, the chairman Mark Hoban said:

Flood Re’s vision is that the market transitions effectively such that insurance will remain available and affordable following this exit.

This is a major task. The UK is a country long afflicted with flooding, and climate change will only exacerbate this.

Will there be a disproportion of “at risk of flooding” vs “non-at risk of flooding” insurance premiums when Flood Re ends?

The hope is that will not be the case, and several insurers are already discussing with Flood Re about two of its initiatives “Build Back Better” and “Be Flood Smart”, the latter being more aimed at the consumer.

But the truth is, we don’t know if flood insurance will be as accessible to consumers following Flood Re’s exit from the market.

So, where does that leave those with a compulsory flood condition as part of their mortgage post 2039?

Without Flood Re, premiums covering properties in a flood zone are typically 25% higher than those outside of a flood zone. They may also bear higher excesses – some as high as £5,000 for flood.

How can we ‘price in’ risk?

Mark Hoban, the chair of Flood Re, admits that if the scheme is needed after 2039 it will represent a market failure.

It is true that the state cannot, on its own, finance resilience for every adverse climate forecast, so to a major extent, market forces should be mobilised to undertake at least a large part of this work. The state is responsible for some of the work to reduce risk – the visible flood defence network and the less visible drainage system already play a part in trying to reduce flood risk, but these works only go so far in reducing risk and are not targeted at individual properties.

Being prepared for the exit of Flood Re and the increases in climate forces in flood risk is obviously a better result for consumers than having the terms of insurance policies restricted where insurers no longer have risk appetite.

It is, therefore, crucial to start as soon as possible the development of better flood models at property level.

GeoSmart’s FloodSmart Analytics

As a highly regarded independent UK based flood risk adviser, whose data have been used in millions of house-buying transactions over the years, we work with large organisations, utilities and with governmental bodies to guide advisers, consumers and regulated firms as they improve their climate risk due diligence related to flood risk at property level.

FloodSmart Analytics, our new flood product, provides detailed risk analysis of individual properties and includes climate change scenarios, enabling users to make risk-based decisions that allow more information depending on the degree of concern – perhaps including a view on mitigation options.

As the Environment Agency, DEFRA and Flood Re have advised consumers to “Be Floodsmart”, Geosmart Information’s new FloodSmart Analytics is ideally placed to provide the necessary flood risk data.

To find out how FloodSmart Analytics can support you, telephone our expert team on 01743 297065 or email