Fitch Ratings expects Flood Re will provide more affordable home insurance covers for high risk UK property, noting that minimal ratings impact is expected for insurers.
In its view the “temporary solution” that will last until 2039 could still be inadequately funded due to increased volatility in weather conditions – with more sudden rainstorms in particular – caused by climate change.
“A study by the Committee on Climate Change estimated that flood defence spending would need to increase by around £20m a year on top of inflation just to keep the number of significant-risk properties steady,” the rating agency said.
Chancellor George Osborne last year announced a government commitment of £700m in additional funds for flood defences in his 2016/2017 budget, funded by a 0.5% rise in the insurance premium tax.
Insurers would be required to make up any shortfall in the near term, Fitch warned, but would then pass on the cost to households through an increase in annual premiums.
A flat levy of £180m ($259m) on UK property insurers, by market share, to fund the backstop will add on £10.50 to the average home insurance policy across the country, the UK government estimated back in 2013, when Flood Re was planned, quoted by the rating agency.
Fitch also agrees with the controversial exclusion of commercial property from Flood Re.
“Fitch believes that the exclusions to the Flood Re scheme are justified. Commercial properties will be excluded due to their more complex risks,” said the ratings firm.
“There is also less evidence of the need for a pooled-flood-risk scheme for businesses. Only residential properties with a council tax band that were built before 2009 will be eligible. The age criterion is intended to discourage further development on flood plains,” added Fitch.