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Flood Insurance

Volume 565: debated on Thursday 27 June 2013

The current voluntary agreement on flood insurance between Government and the insurance industry, termed the statement of principles, ends shortly. Without new arrangements, there is concern that households at flood risk will not have access to the affordable insurance cover they need.

Flood insurance is a complex problem. Ministers have consistently said that the aim is to find a solution which secures the availability of affordable flood insurance for households at risk of flooding without placing unsustainable costs on wider policyholders and the taxpayer. Our preference is to work in partnership with the insurance industry to deliver this.

This Government have therefore been working hard to develop a new approach with the Association of British Insurers (ABI) that promises to allow affordable flood insurance to continue to be available. I am grateful to my right hon. Friend the Minister for Government Policy who has led these discussions on behalf of the Government.

I am today launching a public consultation on how we intend to move forward. We will seek the necessary powers to take action in the Water Bill, also published today.

Following extensive discussions with the Association of British Insurers, we have established the principles for a new flood insurance solution based on their “Flood Re” proposal. I will arrange for copies of the memorandum of understanding we have reached with the ABI to be placed in the Library of the House along with the consultation document.

Flood Re promises to effectively limit the most that hundreds of thousands of UK households should have to pay for flood insurance. We anticipate that up to 500,000 high-risk households could benefit from Flood Re, and pay significantly less for their insurance than they might otherwise. Customers would be free to shop around to get the best overall deal from an insurer of their choice as well as limiting the potential for price rises, with some customers seeing prices fall. Flood Re would also constrain the excesses that could be imposed on households at high flood risk.

The benefits of Flood Re would be targeted towards those who need it most, helping those who are particularly hard-pressed with the cost of living. Furthermore, the ABI has assured Ministers that its proposal can be introduced without impacting customer bills in general. An internal industry levy would fund Flood Re, capturing the existing cross-subsidy in the market. Flood Re would operate as a not-for-profit reinsurance scheme managed by the insurance industry itself. There will be no contingent liability for the Government or the taxpayer from the Flood Re scheme.

Flood Re would be a novel approach and there remain many details to work through with the industry, including the relationship between Flood Re and Parliament. Our broad intention is that Flood Re, rather than Ministers, would be directly accountable to Parliament for its ongoing operations. Ministers would of course remain accountable to Parliament for overall policy on flood insurance. While novel, these arrangements are intended to strike a balance between the full requirements of accountability to Parliament and the need for Flood Re to operate as an integral part of the insurance market. I am writing with further details on this point to the chairs of the Environment, Food and Rural Affairs, Treasury, and Public Accounts Committees. Due to the statutory nature of the levy, Flood Re is also likely to be classed as state aid and so would need to be approved by the European Commission.

While it is our preference to work with the industry towards Flood Re there are therefore still significant issues to be overcome, many outside of the Government’s control. Households deserve to have confidence that this issue will be addressed one way or another. Because of the remaining uncertainties around Flood Re, the Government will also seek powers in the Water Bill to regulate for affordable flood insurance. This approach would be pursued if Flood Re would not or does not deliver what we need, and insurers are otherwise unable to keep prices at affordable levels. If introduced, the fall-back regulatory approach would place an obligation on each insurer to take their share of high flood risk households, or face penalties. This flood insurance obligation would have the objective of sustaining the existing market for high-risk households at affordable prices.

This Government do not intervene in markets unnecessarily, and whichever approach is finally pursued it would only operate for a limited time, and would be withdrawn within 20 to 25 years. In the long term we need to create a situation where everyone is fully aware of their level of flood risk, and households and communities are rewarded through their future bills for the steps they take to reduce flood risk.

We are seeking views on this as the way forward through a six-week public consultation. The Water Bill being published today will contain a placeholder clause on flood insurance. Following public consultation I intend to announce final proposals and introduce updated clauses to the Water Bill by Government amendment later this year.

The best way of securing affordable insurance in the long term is and will always be to reduce the chance of flooding in the first place. Investing in flood risk management remains at the top of the Government’s priorities. The Government also provide a range of further support for households to reduce their risk of flooding and find affordable insurance, for instance by signing up to free flood warnings, and help with fitting flood gates and other property-level protection measures.

I am also pleased to inform the House that insurers have agreed to continue to meet their commitments under the statement of principles until such a time as Flood Re can begin operation. This will provide valuable and immediate reassurance for householders.

The Water Bill will also reform the water sector to support growth and improve resilience, while ensuring it continues to attract long-term investment. It will introduce more competition in order to create a more innovative, efficient and dynamic sector which meets future demands and offers customers more choice and better service.

This Government are committed to delivering a new approach to flood insurance that is better than the statement of principles it will replace. I am determined to ensure, that one way or another, flood insurance is not just available but also that it is affordable. I believe that the proposals set out today will achieve this, and will for the first time provide real peace of mind to households at flood risk. With our investment in flood defence, and our approach to ensuring that only appropriate development takes place in flood risk areas, I am confident we have the right approach to tackling the long-term of risk of flooding.

Together our approach will help us build what we want to see—a stronger and more resilient economy in a fairer society.