Flood Re: Policy & Implementation

1. Insurance Institute of London Lecture 15 January 2014 Flood Re:Policy & Implementation Otto Thoresen Director General, Association of British Insurers Huw Evans Director of Policy, Deputy Director General, Association of British Insurers

2. Flood Re: Overview Managing volatility / dealing with major floods Customers / insurers Flood Re Flood Re Limited CEO CFO • Volatility largely managed through commercial reinsurance • Fund shortages below lower level of reinsurance cover: “Levy II” capital call High flood risk homes (200k-500k homes) Flood premiums Flood claims Scheme Administrator Pot ‘topped up’ by levy funds Industry levy (£180m) Low flood risk homes “Levy I” Industry Levy (tax) Low flood risk homes

3. Flood Re: Overview Managing volatility / dealing with major floods Customers / insurers Flood Re Flood Re Limited CEO CFO • Volatility largely managed through commercial reinsurance • Fund shortages below lower level of reinsurance cover: “Levy II” capital call High flood risk homes (200k-500k homes) Flood premiums Flood claims Scheme Administrator Pot ‘topped up’ by levy funds Industry levy (£180m) Low flood risk homes “Levy I” Industry Levy (tax) Low flood risk homes

4. Customer Proposition • High Flood Risk Polices ceded to Flood Re • Cession at set price, based on Council Tax Band (with CPI indexation): • Flood Re claims funded by premiums and industry-wide levy on UK domestic property insurance providers • Standard £250 reinsurance excess on Flood Re homes • Scope • Eligible Properties:Insured in the name of individuals, council tax band, residential, individual premium, occupied by owner or immediate family. • Exclusions: Council Tax band H (and I in Wales), homes built after January 2009, Small businesses, residential landlords.

5. Claims • Flood claims for Flood Re homes will be handled and funded by insurers, who will then recoup the cost from Flood Re • Flood Re will have no direct interaction with customers • The Flood Re claims ‘bible’ has been developed, setting out: • The high level end-to-end claims processes • The monthly bordereaux data capture requirements, including the required data mapping fields for ceded properties • The process for monthly reconciliations and payments • the approach to a range of common claim scenarios • The claims system is likely to need to accommodate up to 100k properties at any one time • A claims helpline will be set up to provide insurers with updates / information on their claims • A technical committee will arbitrate on any insurer claims issues

6. Flood Re: Overview Managing volatility / dealing with major floods Customers / insurers Flood Re Flood Re Limited CEO CFO • Volatility largely managed through commercial reinsurance • Fund shortages below lower level of reinsurance cover: “Levy II” capital call High flood risk homes (200k-500k homes) Flood premiums Flood claims Scheme Administrator Pot ‘topped up’ by levy funds Industry levy (£180m) Low flood risk homes “Levy I” Industry Levy (tax) Low flood risk homes

7. Structure • Flood Re Limited • Will be designated as the body to run the scheme in secondary legislation • Mutual, owned by its members and limited by guarantee • Not-for-profit entityand no share capital • CEO, CFO, Company Secretary/Legal Counsel employed directly by Flood Re, with a primarily Non-Executive Board • Majority of administrative functions outsourced to a third party scheme administrator • CEOand CFO recruitment process underway

8. Status Flood Re as an industry-owned mutual classified as a public body… Industry owned Industry has control over the key operational decisions, such as with underwriting, pricing, claims and investment issues The Flood Re CEO will be directly accountable to Parliament Public body The Flood Re levy will be classified as a tax Flood Re must operate according to ‘Managing Public Money’, and work in accordance with both public and private sector accounting standards Other financial controls to limit its impact on the public finances in any given year …but NOT a QUANGO

9. Flood Re: Overview Managing volatility / dealing with major floods Customers / insurers Flood Re Flood Re Limited CEO CFO • Volatility largely managed through commercial reinsurance • Fund shortages below lower level of reinsurance cover: “Levy II” capital call High flood risk homes (200k-500k homes) Flood premiums Flood claims Scheme Administrator Pot ‘topped up’ by levy funds Industry levy (£180m) Low flood risk homes “Levy I” Industry Levy (tax) Low flood risk homes

10. Prudential Issues • ABI is working closely with advisory firms and regulators on Flood Re’s regulatory authorisation • A roadmap has been developed providing key submission timeframes • A regulatory business plan is being developed showing how Flood Re will operate in the market place • Modelling of expected capital requirements (MCR and SCR). • Internal model development will be based on Solvency II requirements • Detailed 3-5 year financial projections to be developed • Systems and controls to be documented • Appointment of both approved persons and controllers • Work with appointed reinsurance broker to provide inwards (insurer-Flood Re) and outwards (Flood Re-reinsurer) reinsurance contracts

11. Addressing risk-ownership challenges • Handling cash shortfalls (below reinsurance retention) – ‘Levy II’ • Short term member capital calls classified as an ‘investment’, to be paid back at the discretion of the Flood Re directors • Avoids P&Lvolatility for member insurers • Avoids classification within Government as debt • No prior approval from Parliament required to exercise / pay back • Handling catastrophic losses (beyond 1: 200 annual aggregate loss) • Outgoing reinsurance limit set at 1: 200 annual aggregate loss • Government will not formally step in if this is exceeded, but will take ‘primary responsibility’ for allocating any available resources • External consultants have advised that these parameters will not increase the industry’s capital requirements for flood above current levels in the market

12. Reinsurance • Flood Re will need to smooth its losses, and will look to buy reinsurance protection between £250m and a 1:200 annual aggregate loss level (currently estimated at £2.4bn, but to be confirmed) • The precise structure of the reinsurance cover is not yet finalised – but is likely to include elements of quota share, excess of loss and stop loss • The public procurement tender and framework process for both the broker and reinsurer contracts is scheduled for February – September 2014: • May 2014: Broker appointed • May – Sept 2014: Appointed Broker will work with framework reinsurers to provide the full reinsurance solution, reinsurance contracts, policy administration, accounting, claims managementand management information • Final reinsurance placement planned for early 2015 • London Market expertise in this process will be highly valuable

13. Flood Re: a world-first project Managing volatility / dealing with major floods Customers / insurers Flood Re Flood Re Limited CEO CFO • Volatility largely managed through commercial reinsurance • Fund shortages below lower level of reinsurance cover: “Levy II” capital call High flood risk homes (200k-500k homes) Flood premiums Flood claims Scheme Administrator Pot ‘topped up’ by levy funds Industry levy (£180m) Low flood risk homes “Levy I” Industry Levy (tax) Low flood risk homes

14. Project Resourcing • Project Plan containing over 170 currently open work packages, with 64 completed to date • The Flood Re implementation team by 1st Feb will consist of: • Seven full time dedicated project staff • Six staff within the ABI’smanagement and support teams • Four industry CEOsproviding strategic oversight • Over thirty ABI member experts providing delivery and review support • 20 direct staff at Defra • Top level 3rd party professional advice.

15. Current Operational Milestones