OREANDA-NEWS. Fitch Ratings says in a new report that Flood Re, a joint industry- and government-sponsored scheme to enable flood cover to be affordable for those households at highest risk of flooding, will be effective in making home insurance temporarily affordable for policyholders but will not reduce flood risk in the long term.

Flood Re will have a limited impact on the ratings of UK non-life insurance companies due to their size and business/geographic diversification. Companies will benefit from an increase in the number of potential customers and from access to a nationally aggregated flood risk database.

Flood Re begins in April 2016 and will be funded by an industry levy of GBP180m, which is expected to be passed on to policyholders at GBP10.50 per policy on average. Insurance companies will then be able to pass on flood risk through the purchase of subsidised reinsurance from Flood Re.

The scheme is intended as a transitory measure and will be gradually phased out with an expiration date of 2039.

Prior to Flood Re there was an informal agreement between the government and the insurance industry, called the Statement of Principles (SoP). The SoP required the government to invest in flood defences in order for the insurance industry to make flood cover available. Flood Re contains no such clause and leaves funding for flood defences exposed to political will and budget constraints.

The scheme's ultimate goal is for the insurance industry to return to risk-reflective pricing at the expiry of Flood Re without the current issue of flood cover being unaffordable for many households. Achieving this goal will require large-scale improvements in flood defence and resilience measures.