Rainy day fund for floods

The flood fund - how it would work.

Insurers are proposing that the government should back a special insurance fund to cover flood-related home insurance claims from the 200,000 properties at greatest risk.

These are the homes they warn will not get insurance from July next year unless ministers agree to a deal.

It would be the ultimate rainy day fund, to include:

*a levy which matches the amount currently creamed off from everyone's household policy to pay for flood victims, perhaps £8 each from up to 25 million homes - so roughly £200m a year.

*an additional premium from the 200,000 most risky homes, whose owners pay more for cover - each additional £500 brings in an extra £100m.

*a guaranteed interest-free overdraft from the government to cover crisis years, when there isn't enough in the fund

The first two elements can be imposed by insurers. It's the last one which is the big sticking point with the government.

The fund is a bit like a sinking fund and at the moment it's been sunk  - not just because there is a potential bill for the taxpayer but because that bill could be open ended.

Why? The reason is that if we have more years like 2007 when insurers had to fork out £3bn to deal with flood damage, the fund itself would be inundated and overwhelmed.

How could the overdraft be paid back then? It would hard to hold homeowners to ransom with swingeing extra premiums, so the state might be forced to meet the bill.

If that happened, there would be pressure to move directly to an openly state-guaranteed safety net, as they have already in the United States and some other EU countries.

So, while insurers argue that any overdraft in the fund would be returned over time, it seems the idea is seen in Whitehall as a slippery slope.

Remember that it's hard, and usually impossible, to get a mortgage on a property which doesn't have insurance - including cover for flooding.

So, unless a deal is struck, there's a danger that hundreds of thousands of homes could became unsellable except to cash buyers.