The UK Government and the Association of British Insurers (ABI) have signed a memorandum of understanding to develop a flood insurance pool.

Flood Re will be run and financed by insurers as a non-profit fund to cover the cost of claims from high-risk homes. It is expected to be operational by mid-2015.

“Insurers’ priority has always been to ensure flood insurance remains affordable and available for everyone who needs it,” ABI Director-General Otto Thoresen said.

When insurers receive claims from high-risk households they will pass the flood risk element to the pool. Premiums for flood risk will be calculated based on council taxes.

Insurers will pay an annual charge of £108 million ($126.76 million), equating to a levy of £10.50 ($12.32) on annual household premiums.

The ABI says this represents the estimated level of cross-subsidy that exists between lower and higher flood risk premiums.

Deloitte UK Insurance Partner James Rakow says 200,000 British households are at “very high” risk of flooding.

“A key challenge for insurers is to ensure their risk models and flood data are accurate enough to make effective pricing and underwriting decisions,” he said.

“Last year was the wettest [UK] summer for 100 years; in June alone the Environment Agency issued 50 flood warnings and insurers’ flood claims hit £17 million ($19.95 million) a day.”