Government eyes household levy to subsidise flood cover

A van drives through flood water at Littlehampton in southern England June 11, 2012.

LONDON (Reuters) - British households may have to pay a levy on their home insurance premiums to subsidise flood cover for those in high-risk areas, Environment Minister Caroline Spelman said on Wednesday.

The proposed charge is designed to ensure homes in flood-prone areas can buy affordable cover after the expiry next year of a deal under which insurers cut prices for at-risk customers in return for increased government spending on flood defences.

Record rainfall over the last three months has brought repeated flooding to parts of Britain, prompting warnings from analysts that insurers may miss profit targets because of a surge in claims.

A government advisory panel warned on Wednesday that the risk of flooding in England could increase fourfold by 2035 unless more action to deal with the impact of climate change was taken.

With further heavy rain forecast this week, Britain's environment agency had issued five flood warnings by midday on Wednesday.

"The government and insurers are determined to see insurance premiums remain affordable, particularly in light of the pressure household budgets are currently under and the pattern of flood events we have seen over recent years," Spelman said in a statement.

She said a flood levy, under discussion between the insurance industry and government, would not push up premiums as insurers already fund cheap deals for flood-prone homes through higher prices for customers who are not at risk.

But making the charge explicit and applying it across the industry would prevent individual insurers from seeking a competitive advantage by refusing flood cover to people living in at-risk regions.

Spokeswomen for the Association of British Insurers and the Department for Environment, Food and Rural affairs (Defra) declined to comment on the likely size of the levy.

Insurers and Defra officials have been in talks for months over ways to ensure at-risk homes can continue to buy affordable cover once the current deal expires in June 2013.

The government has said it does not want the new arrangement to impose further costs on taxpayers or policyholders.

"We have done a lot of work on this issue and are currently at an advanced stage in our discussions," ABI director of general insurance Nick Starling said.

One option under discussion is a reinsurance programme, dubbed Flood Re, which would take on some the insurance industry's flood risk in return for a premium, and which would rely on a taxpayer-funded backstop in the event of an extreme flood.

Britain has been hit by several bouts of severe flooding in the last 10 years, with one in the summer of 2007 costing the insurance industry about 3 billion pounds.

There are about 200,000 homes in regions at risk of flooding, according to the ABI.

Britain's biggest home insurers include RSA (RSA.L), Aviva (AV.L) and Royal Bank of Scotland's (RBS.L) Direct Line.

(Reporting by Myles Neligan; Editing by David Cowell)