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Insurer levy would help pay for U.K. homeowner flood insurance fund

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Insurer levy would help pay for U.K. homeowner flood insurance fund

The U.K. government and the Association of British Insurers have signed a memorandum of understanding to create a nonprofit fund to provide flood insurance for homeowners in high-risk areas.

The proposal, known as Flood Re, is to be funded by a levy on insurers and will cap premiums for homeowners in areas deemed to be at high risk of floods.

Those homeowner premiums will be based on Council Tax bands, the ABI said in a statement. The levy on all U.K. insurers that write homeowners coverage will be passed on to all household policyholders via an average charge of about £10.50 ($16) per policy.

“Homeowners already pay this, as some cross-subsidy has always existed between lower and higher flood areas,” the ABI said.

The fund likely will be operational by the summer of 2015, the ABI said. The action has come after homeowners in high flood-risk areas found it difficult to obtain coverage, particularly in the wake of severe flooding in 2007.

Aon Benfield, the reinsurance arm on Aon P.L.C. that has been the adviser on the project, described the fund as a “novel approach” to ensure that homeowners “are adequately protected against flood risk.”

In a statement, Fitch Ratings Ltd. said it believes the proposed fund would remove uncertainty from the market and “enable insurers to balance exposure to high-risk properties.”

Similar pools to cover flood risk have been adopted successfully in other European countries, the London rating agency said.