MPs query workings of UK flood insurance scheme

LONDON Thu Jul 4, 2013 12:05am BST

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LONDON (Reuters) - A group of lawmakers has questioned government plans to guarantee insurance for houses in flood-threatened areas, asking how it will be able to cap the premiums and fees paid by house owners while capping the risks for taxpayers.

In a report on managing flood risk published on Thursday, the Environment, Food and Rural Affairs Committee of MPs welcomed the agreement in principle to guarantee affordable insurance for affected homes but raised several questions about how it would work.

The committee said it hoped for clarification on how the scheme, known as Flood Re, will be accountable to government and how the burden on taxpayers would be kept under control in the event of a catastrophic flood.

"It is not clear how assurances will be enforced to limit the amount of levy to be paid by all householders and maintain premiums at affordable levels for those in the scheme," the committee said.

The Flood Re fund will replace an agreement which expires this month, under which insurers offer subsidised cover to hundreds of thousands of flood-prone homes in exchange for a government pledge to build more flood defences.

Talks between the Association of British Insurers (ABI) and the government broke down in November 2012, when Britain's heavily-indebted government told insurers it would not provide an overdraft to the proposed fund.

But the two sides said last month they had agreed a memorandum of understanding (MoU) on how to develop the not-for-profit scheme.

Britain's biggest home insurers include Aviva Plc, RSA Insurance Group Plc and Direct Line Insurance Group Plc.

The committee also said on Thursday it welcomed increased funding for flood defences which allow the insurance industry to continue with existing provision of affordable flood insurance until the new regime is agreed.

Insurers charge an average of 10.50 pounds on every household premium they sell to cover homes in flood-prone areas.

Flood Re will siphon off that levy into a fund to build up a reserve to cover future flood claims from high-risk homes.

Britain has been hit by several severe floods in the last 10 years, including in 2007 which cost insurers about 3 billion pounds.

(Reporting by Chris Vellacott; editing by Patrick Graham)

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