Moody’s questions UK Flood Re scheme structure

Proposals for a government-backed flood reinsurance scheme in the UK are credit negative for property and casualty (P&C) insurers, according to rating agency Moody’s, which has criticised a proposed cap on the government’s annual contribution to the scheme.

The UK Department for Environment, Flood and Rural Affairs (Defra) released for comment proposals to determine the funding, operations and scope of the scheme. Among the proposals is a £100 million cap on the amount that the UK government would contribute to the scheme each year.

According to rating agency Moody’s such a cap would be credit negative for UK P&C insurers because it risks preventing the flood reinsurance scheme from making sufficient payments to insurers in years of severe flood losses, thereby limiting the scheme’s benefits to member insurers.

The rating agency added that disputes about the regulation of the reinsurance scheme threaten to delay its implementation, which would also be credit negative. Defra will accept comments until September, and plans to launch the scheme by next summer.

The scheme aims to limit the cost of property insurance for UK residential properties at the highest risk of flooding by giving insurers the option to cede such flood risks to the reinsurance scheme. These risks would then be pooled into a fund that pays out to the insurer if claims are made. Moody’s said that this would limit insurers’ exposure to flood-prone UK regions, and as such its implementation would be credit positive for the sector.

Funding for the scheme would come from annual levies on insurers that would total £180 million a year for the first five years, and would be subject to review thereafter. Insurers would pay these levies based on their market shares.

“Because the UK government would ultimately back the scheme, a cap on the amount that it can inject into the scheme in any given year increases the risk that the fund cannot make sufficient payments to its members in years of severe flooding, such as in 2007, when residential insured losses totalled £1.5 billion, according to Defra and PricewaterhouseCoopers,” said the rating agency.