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Say your home suffered during the 2007 or 2009 floods in the UK. Perhaps you had to make a claim on your home insurance for flood damage. So now, a few years later, you get your regular letter from your insuarance company who have decided to up your insurance excess from £250 to £20,000! That’s a pretty steep rise.
Following the floods in the UK during 2007 and 2009, there have been quite a few changes in the world of home insurance, particularly when it comes to flood cover.
After the 2007 floods, the UK government and the Association of British Insurers (ABI) got together tto set out a plan for the way ahead. The idea was a fairly simple one: to make sure that home-owners in flood risk areas would still be offered affordable home insurance. This agreement also included actions from the government to build up flood protection schemes across the country. In other words, the whole scheme appeared a solution to buy some time for those at flood risk, whilst better protection from flooding could be developed in critical areas.
However, that agreement between government and insurers comes to an end this year, in June 2013, and insurers are already shaping up for what home insurance will be like should, or if, the agreement not be renewed. For those in flood risk areas, this means higher costs, and in particular, a big rise in insurance excess.
An insurance excess payment is the amount the insurance customer, in this case the home owner, is responsible to pay in the event of flood damage. In other words, how much a flood victim will have to pay out themselves before his or her insurance company will get involved.
The Environment Agency estimates that as many as 570,000 homes and businesses in England and Wales have a high risk of flooding. With flood insurance strategies about to fall over a cliff edge, insurers have reacted by upping either the premium or the excess. For example, the Shadow Secretary for Environmental Issues, Member of Parliament for Wakefield Mary Creagh, has said that such big rises in insurance excesses were to be completely unaffordable for many households.
Mary Creagh went on:
“We could see whole areas of the country blighted. If the excess is thousands of pounds, people won’t be able to get a mortgage, or sell their home.”
Some reports have claimed that insurers have been asking for as much as £20,000, compared with a more typical £200 for a home not considered to be in a flood risk area.
As Mary Creagh points out above, this will lead to misery and confusion – even panic – amongst home owners, mortgage lenders and in the property market generally. Surely this could well lead to a crash in property prices in those areas considered a flood risk. And wouldn’t an increase in insurance costs – both a premium and excess – make it dramatically harder for the property owner to pay the mortgage every month.
Last year (2012) the Association of British Insurers sent out a press release stating that UK insurance companies had received about 1000 claims per day on flood insurance, with an average payout of around £18,000. So the figure of £20,000 could be significant. You might be thinking that the insurance industry is actually shooting themselves in the foot here. For example, if they are to demand a £20,000 insurance excess for protection from flood damages, then surely home-owners might consider flood protection poor value? Why pay for insurance that won’t pay out? Or it could lead you to think that UK insurers would actually prefer to avoid insuring flood risk customers.
One final note: it is difficult to read between the lines here about who is stalling on finding an agreement for affordable flood insurance between the government and ABI. But the ABI did say:
“We have put forward a flood insurance fund proposal which we believe is the only solution to ensure affordable flood insurance in the future,” it added.
“In no other country is flood insurance for those at high flood risk available on the open market without some form of government involvement.”
Source: Financial Times