UK flood insurance scheme can cope without further industry cash -chairman

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By Carolyn Cohn

LONDON, April 4 (Reuters) - A British scheme launched on Monday to cut insurance costs for homes in flood-risk areas should be able to cope without calling on the insurance industry for more cash, Chairman Mark Hoban said.

The Flood Re scheme was set up by the government and industry in response to severe flooding in recent years. It (Other OTC: ITGL - news) is funded in part by a 180 million pound ($256.8 million) annual levy, or tax, on the industry.

Flood Re can ask for a further levy - levy two - if it needs to. Analysts have speculated that a further levy could be needed, particularly as climate change leads to more flooding.

"We do not expect to charge levy two," Hoban, a former government minister, told Reuters. "It's there as our protection ... levy two would be in extremis."

Under new European solvency rules, insurers need to set aside enough capital for a 1-in-200 year event. Flood Re is designed to cope with even more extreme events, Hoban said.

Flood Re has more than 2 billion pounds in reinsurance cover per year, to share the risk to insurers of providing insurance to up to 350,000 homes, nearly 2 percent of British households.

The reinsurance protection will enable insurers to cut premiums for householders, as well as reducing the excess - the first part of the claim which customers need to pay themselves.

The insurance costs of three large storms in Britain this winter, prior to the launch of Flood Re, was 1.24 billion pounds, insurance data company PERILS estimates.

Price comparison websites on Monday showed a house in Cumbria in northwest England which had been hit by flooding in 2012 was being offered a Flood Re-backed policy at 810 pounds, with a 250 pound excess, Hoban said.

Previously, the quote was for a premium of nearly 6,000 pounds and excess of 25,000 pounds.

Listed insurers Admiral, Aviva (Other OTC: AIVAF - news) , AXA (EUREX: 486352.EX - news) , Direct Line (Other OTC: DIISD - news) , Hiscox (Berlin: H2X3.BE - news) , Legal & General (LSE: LGEN.L - news) and RSA are among insurers and brokers which have signed up to Flood Re.

Home insurance sales in flood-risk areas are expected to rise due to the lower premium costs, bringing in a profitable new source of business.

"Household insurance is one of the very few types of insurance where insurers can make money," said Mohammad Khan, general insurance leader at consultants PwC.

The industry levy is expected to be passed onto homeowners across Britain, at an average of 10.50 pounds per policy. ($1 = 0.7008 pounds) (Additional reporting by Noor Zainab Hussain; Editing by Mark Heinrich)