UK must increase flood defence spending, insurance scheme chair urges

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Ministers must “go further and faster” on UK flood defence spending as the scale of the challenge from a worsening climate grows, the outgoing chair of the country’s flood reinsurance scheme has warned.

Mark Hoban told the Financial Times that the government, which has pledged a record £5.2bn on tidal barriers and other defences by 2027, would need to increase funding still further as climate change makes flood risk worse.

The former City minister said returning to a free market for flood insurance by 2039 would depend on that extra money and action by homeowners to improve the resilience of their properties. Flood Re, the public-private initiative to support the market that Hoban leads, is set to end then.

“If you think that climate change is exacerbating risk over time, we need to go further and faster in order to see flood risk reduce,” said Hoban, who is due to step down from his role this year.

Only then would premiums for homeowners “remain affordable” when Flood Re ends, he said, adding: “We need to pick up momentum.”

More than 250,000 people have home insurance policies whose flood component is underwritten by Flood Re. Launched in 2016 and funded partly by an annual industry levy, the scheme is intended to exist only until flood risks are better managed and insurers are able to again underwrite these risks alone.

Flood Re is this week setting out its latest transition plan, detailing proposals aimed at making the UK flood resilient by 2039. They include ensuring that no new homes are built in flood-prone areas and investing more in maintaining existing flood defences and drainage systems.

According to Bank of England projections, about 2mn homes risk becoming uninsurable in 30 years’ time in the most extreme climate-change scenario, in which no additional action is taken against global warming.

Arguing that such widespread insurance problems would create instability in the roughly £1.2tn market for UK household property debt, Hogan urged banks to be “proactive” and let people borrow through their mortgage to fund resilience measures such as flood doors and placing electrical sockets higher up in homes.

He also reiterated a call for insurers to adopt “Build Back Better”, a scheme launched by Flood Re, where customers whose homes are flooded receive extra money to improve resilience as they begin repairs.

Hoban said it would be a “sign of failure on behalf of the entire system if Flood Re had to exist beyond 2039. We do have time to get this right but it does require everyone to put their shoulder to the wheel.”

A relatively quiet year for floods led Flood Re to pay out £46mn of claims in the year to March 2023, far surpassed by £52mn in premiums taken in and £135mn in levy income, according to its latest accounts.

In the same period, the scheme’s assets further grew to £772mn. Hoban said Flood Re needed to be “well capitalised” for the next period of extreme weather.

Questioned last month by the House of Commons Treasury select committee on whether a private market could realistically replace the scheme in 2039, Cristina Nestares, UK head of Admiral, said the challenge of underwriting flood risk was “not going to go away”. She added that Flood Re was “positive, and we want to find a way to continue with it”.

Charlotte Clark, director of regulation at the Association of British Insurers, said the 2039 end date reflected “the idea that, by then, the UK’s flood defences will be sorted and we will no longer be building on flood plains”.

“If those things do not happen, the demand for Flood Re will be there,” she added.

The government said that more than 500,000 homes had benefited since Flood Re was launched. “We will continue to work closely with Flood Re and industry ahead of the scheme ending in 2039 to ensure access to affordable insurance,” it said.

UK Finance, which represents the banking industry, said lenders can provide additional borrowing to help homeowners finance flood resilience measures, subject to an assessment of whether they can afford it.

“When considering funding home improvements, customers should consider a range of borrowing options, in addition to increasing their mortgage,” it added.