The UK government has announced reforms to Flood Re (the flood insurance scheme of last resort) that will reduce multimillion-pound payouts to the wealthiest households, which ministers say have created an unfair burden on the scheme. The change marks a meaningful shift in how the state backstops climate-related insurance risk for high-value properties, and comes well ahead of the scheme's scheduled dissolution in 2039.
The reforms introduce two signals that mortgage lenders should begin incorporating into their next round of climate scenario analysis. First, by focusing the scheme more tightly on lower-value homes, the reforms create a plausible scenario in which owners of higher-value properties face escalating insurance costs and declining valuations, increasing both probability of default and loss given default, particularly at higher loan-to-value ratios. Second, the proposed introduction of Flood Performance Certificates (FPCs) could, in time, provide a useful input to credit decisioning and risk modelling, though the scheme would do well to learn from the persistent shortcomings of Energy Performance Certificates (EPCs) before banks are expected to place undue weight on them.
