We are less than thirty days away from the launch of FloodRe, the UK reinsurance scheme for eligible properties in areas of ‘high flood risk’. If it turns out to be all that it’s held out to be, then it should make a real difference for many consumers who over recent years have been experiencing enormous increases in premium and eye wateringly large excesses.
Even at this stage however, FloodRe is only talking about its ‘planned launch’ in April, on what I understand to be April 4th. Hardly a confidence boosting perspective. And even after its launch, there are going to be a number of ethical issues that will need attention.
Some may think that a major launch is hardly the time to be bothered with ethics, yet in fact, the opposite is the case. Just as its launch is heralded by the insurance industry, questions about fairness and transparency will come to the fore, as commentators explore the boundaries that have been set for it. So what questions might be raised? Or to put it another way, what ethical issues might FloodRe’s board wish to think over? Here are five to start with.
Transparency: the number one question consumers in areas of high flood risk will be asking is whether their insurer is part of FloodRe, and for those renewing in April, whether their quote is covered under FloodRe? Insurance firms have taken a relaxed attitude to declaring their participation, even though they will have made their minds up a long time ago. Hardly a trust-building attitude from the market, around a body labelled as ‘publicly accountable’.
Premiums: every household policyholder in areas of high flood risk has seen significant increases in premium in recent years. Will they seem commensurate decreases in their renewal premiums after April, down to their insurer’s ceding premium to FloodRe? Or might some insurance firms take the opportunity to raise rates for other parts of the overall risk, on the basis that these policyholders have been able to afford that much higher premium up to now? That may sound a bit ‘pot half empty’, but as every insurer will emphasise, it’s a competitive market and every ‘top of the screen’ new business quote needs to be funded from somewhere.
Boundaries: will policyholders of properties at medium risk of flood find their premiums and excesses rise, as decisions over the financial implications of their exposure come to be revisited? Might some insurers now see their main flood exposure coming from properties just outside of FloodRe and start moving those premiums upwards, or pushing those policies elsewhere? It’s a market after all and a change like FloodRe introduces all sorts of risks and opportunities.
Assumptions – will aggregators and insurer quote engines now do more to highlight the absence of flood cover where that’s the case? The transparency of assumptions has been a particular weakness of both in the past. Should the involvement or otherwise of FloodRe in a particular quote be made a material disclosure on the part of the quote provider? The sector has been somewhat underhand in how it has addressed quote assumptions and it really does need to play a more ‘above the board’ game in this respect.
Governance: the lack of anyone able to act as the ‘voice of the customer’ on FloodRe’s board is a failing that needs to be addressed quickly. And by customer, I don’t mean the ceding insurers, but the policyholders in areas of high flood risk. The board, both executive and non-executive, is full of industry insiders, with only one that may not have one foot firmly in the insurance camp. The dangers of governance ‘groupthink’ is significant. I very much doubt if the present board would be able to hold an effective debate about something like fairness.
Some of you may think I’m ignoring the implementation mountain that FloodRe has had to climb. Having climbed such a mountain myself, in organising the largest ever transfer of motor residual value risk into the market, I’m familiar with the scale of the challenges it has been facing. That RV transfer also had a significant public interest dimension and keeping that front of mind was a pre-requisite for how success was judged.
I wish FloodRe every success, but I’m not sure it will succeed as much as it thinks. It has laid some obvious hurdles in its path and the public will be cautious in trusting it until those hurdles are addressed.
Duncan is the founder of the Ethics and Insurance blog and the author of its many posts. He's a Chartered Insurance Practitioner, having worked 18 years in the UK market. As an adviser to many firms on ethics issues, as well as a regular conference speaker, he is one of the leading voices on ethics and insurance.