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Flood Re Insurance Scheme

Volume 618: debated on Tuesday 6 December 2016

[Mr Philip Hollobone in the Chair]

I beg to move,

That this House has considered the Flood Re insurance scheme.

It is a pleasure to serve under your chairmanship today, Mr Hollobone. I am delighted to have the opportunity to move the motion.

Back in 2005, Carlisle was badly affected by floods, following which substantial investment was made in flood defences. By December 2015, the view was that Carlisle was probably safe from further floods and would not be affected. Exactly one year ago today, however, Storm Desmond struck the United Kingdom and in particular Cumbria. It was an extraordinary weather event, and the floods had a profound effect on our city.

For the record, the emergency services were absolutely brilliant. We must also recognise the contribution of individuals—friends, families, strangers—and communities. They all did a terrific job. I acknowledge, too, the contribution of Government. Central Government and local government rose equally to the challenge of the times, giving great support, manpower and assistance to the community.

To give one small example, the week after the floods I asked the then Chancellor at Prime Minister’s questions if he would support the Cumbria Community Foundation. He indicated that he would match any funding raised. The foundation subsequently raised £5 million, which meant that, with the matched funding from central Government, £10 million was available, helping people enormously throughout Cumbria to recover from the floods. Work by the Environment Agency and the Cumbria Community Foundation is still going on, and people are gradually getting back into their homes. For the future, the Government have also committed a further £25 million to flood defences, which I am sure the EA will invest in and around Carlisle over the next few years.

What of the impact of Storm Desmond? From a Carlisle perspective—not even Cumbria, just Carlisle—more than 2,000 individual homes were directly affected. The knock-on impact on families, friends and the wider city was considerable. Furthermore, hundreds of businesses were affected, ranging from small, one or two-employee businesses to large factories such as McVitie’s, which has more than 800 staff—I am delighted that it is back up in production now.

Nor should we forget the side effects of the floods on sporting facilities. Carlisle lost its tennis, rugby, squash, football, cricket, bowls and athletics facilities. The impact of that on the wider community is quite extraordinary. Furthermore, many people do not appreciate that three secondary schools were also affected. One of them has closed at its original site and is looking to move to a different location. The impact on Carlisle, its community, individuals, families, businesses, schools and social clubs, can therefore be appreciated. The effect was dramatic and is still ongoing.

It is important to set the scene for the Minister and explain what happened in Carlisle as a result of the floods then and subsequently. However, the purpose of today’s debate is to address one particular aspect of flooding, namely Flood Re, which I will talk about from my perspective. A number of my colleagues are present today, and they will have their own views and issues to do with their own local communities, including the impact that Flood Re may or may not have had on individual households and the wider community.

For the record, Flood Re was an excellent bit of thinking by the Government and the insurance industry. Overall, it has been a great success. It took a number of years to get there; nevertheless, it was an inspired bit of thinking by the industry and Government, which reached a sensible compromise that has been hugely beneficial to many people up and down the country. The statistics are starting to tell the story about the number of people who managed to get insurance under the Flood Re regime.

An important thing from the Carlisle perspective was that the 2015 floods came, in many respects, unexpectedly—given what had happened in 2005 and the subsequent work on flood defences. At the time the community was badly affected and morale was low, but the one thing that gave people a little confidence was that through the Flood Re scheme they knew they could get insurance. That was vital for individuals and householders. I congratulate the Government and the insurance industry on Flood Re, because it is a job well done.

Therefore I am not here to be negative; I am here to be constructive. As with any new idea or piece of legislation passed by the House, however, sometimes issues can be overlooked, particular circumstances not taken into consideration, or judgment calls by the Government or the industry might need some adjustment or further thought. Perhaps the Government need to review the Flood Re regime and make some adjustment to it for the future.

I will concentrate on the specific issue of long leaseholders, although I accept that there are other issues with regards to leaseholds and so on. For example, there is what I call the accidental landlord—someone who for whatever reason, perhaps a job, might have to move to a different part of the country. Such people might not be able to sell their house, or they do not want to because they intend to move back to the area, so they lease the property out while purchasing or living elsewhere. That is clearly an issue, because they would not be able to get Flood Re insurance for the house they have vacated. That is a side issue for me, today in particular, but it is worth the Government looking at it.

I will concentrate on the long leaseholder. The purpose of Flood Re, as I understand it, is to help owner-occupiers—those who own their own principal private residence—not commercial owners. I fully understand the thinking about commercial owners, and in many respects I accept that.

I thank my hon. Friend for securing the debate. He is always a great champion of Carlisle and the north-west. May I make a point about non-commercial, community assets? On Boxing Day in my constituency, the village of Croston was badly flooded by Storm Eva, but Croston community centre is not eligible for assistance under the Flood Re scheme and it has been quoted excess of £35,000. The future of the centre, which of course was a hub of activity in the floods, is now unviable. I know my hon. Friend is concentrating on long leaseholders, but does he have anything to say about that?

I have some sympathy with what my hon. Friend says. In Carlisle, the sporting facilities were badly affected and they have ongoing issues with their insurance. She has raised a similar issue, which the Minister might wish to address when she sums up.

My constituency, including several thousand homes and several thousand businesses, was also badly hit. Last weekend I met some residents of a block of 10 leasehold flats, next door to seven bungalows. The bungalows are eligible for Flood Re, but the 10 leasehold flats are not—one resident had bought a flat because they could not afford a bungalow. Does my hon. Friend agree that the £50,000 excess that each flat individually is being charged for flood insurance is excessive? Does he agree that Flood Re should be relooked at for that area of private residents?

My hon. Friend is in many respects raising the very issue that I am about to deal with, so I obviously have a great deal of sympathy. Again, it will be interesting to hear what the Minister says about that point.

The real issue concerns long leaseholders who live in a property that is in effect their principal private residence—it is where they live, have their family and community, and so on. To all intents and purposes they are homeowners, but for a variety of legal and technical reasons they do not own the freehold—they are long leaseholders, but they do not own the freehold.

A group of long leaseholders will have a lessor, which is usually a management company. The management company owns the freehold and individuals take a lease on the property. Often the management company is in fact owned by the leaseholders. Leases may be for 999 years, and the freeholder is the management company, which would control it from there. They would be responsible for the communal areas, which could include grass cutting and roads, and may be responsible for parts of the fabric of the property, depending on the nature of the leasehold interests—whether it is a tenement flat going upwards or a group of properties next to each other. There will be variations, depending on the structure of the agreement at the outset. Interestingly enough, the landlord will be invariably responsible for ensuring that covenants between leaseholders are enforced to ensure that they comply with certain requirements under the terms of the leases.

It is interesting that the Flood Re legislation already allows for that set-up to a certain extent. It is allowed for properties of three flats, and three only. We could therefore have a situation where a landlord occupied one of the three properties—admittedly, they would have to live in one of them—and had another two on leasehold that are covered by Flood Re.

I will read from a letter from someone in the circumstances that I have raised. The freehold area is known as Willowbank, and he says:

“Willowbank is owned by a company, but that company is owned by the 29 leaseholders. The company has no income and no reserves. It makes no profit and pays no dividend. The two directors are paid neither a salary nor expenses.”

In many respects, Flood Re was there to help people like that. They are principal private occupiers who own their properties that are effectively freehold, but for whatever technical reason they are called leasehold and not covered by the legislation.

The legislation is meant to cover the whole of the United Kingdom, which includes Scotland, and in Scotland they have tenement blocks. As I understand it, the set-up under Scottish legislation is similar, but the tenement blocks, which are similar to the scenario I have set out, are covered by Flood Re legislation. I genuinely believe that it was not the intention of the legislation or of Parliament to exclude those I have described from Flood Re. I think the goal was to help secure the insurance requirements for people in those circumstances.

I want to come in on the positive aspects of Flood Re. Having grown up in Carlisle, I would also like to say that it was horrific and heartbreaking to see so much of the city knee deep or worse in water. I hope that most people have fully recovered.

More positively, Flood Re has made a real difference to many in my constituency, who have seen reduced premiums, reduced excesses and insurance made available when it was not before. Notwithstanding my hon. Friend’s reservations, will he commend the Government on taking such positive action and remind them that many businesses are still worried and in need of help?

I agree wholeheartedly with my hon. Friend. Flood Re has been a success. I have seen that in my constituency, where people now have confidence that their house will be insured. What I am trying to get at is a small group of people. In the setting I mentioned earlier, 29 houses were involved and in another scheme in Carlisle there are, I think, 68, but there will not be many other than those. I suspect that there will not be too many in such circumstances in the flood areas up and down the country, so most people will be able to get the appropriate cover, which, as she rightly says, is a positive.

The hon. Gentleman is being generous in giving way. I, too, congratulate him on this important debate, which will be welcomed by his constituents and by everybody who has been seriously affected by flooding. Has he examined the proposal recently launched by the British Insurance Brokers Association that is intended for commercial properties and which I understand will also cover long lets? Is there not a danger, though, that because premiums are calculated on specifically targeted risk, they might end up as unaffordable for people in long-lease properties?

The right hon. Gentleman raises an interesting point. I am aware of the proposal with regards to commercial properties, which may be a way forward for them. I have concentrated on a narrow point with regards to the circumstances surrounding Flood Re.

To conclude, will the Minister bring forward a constructive review of Flood Re? Will she consult Flood Re and the insurance industry? Will she listen to the concerns of homeowners in my constituency who genuinely feel that they are being let down by the legislation and are unable to get that security and insurance for flood? It is an ongoing concern for them that if we get another Storm Desmond, they will not necessarily have the money to refurbish their properties. I do not think that is the intention of the legislation. I hope the Minister will take on board the arguments that I have set out about the legislation and will acknowledge that there was an oversight, or that something was missed when it was considered, and that it would be appropriate to bring forward primary or secondary legislation to expand Flood Re to cover that small group. That would assist a small group of people in my constituency, but it would be hugely beneficial and give them confidence for the future.

It is a pleasure to serve under your chairmanship, Mr Hollobone. I thank my hon. Friend the Member for Carlisle (John Stevenson) for raising the issue of access to affordable flood insurance and the Flood Re scheme. For those at high flood risk, whether households or businesses, or indeed community leaders and their surrounding communities, this matter is a central one.

I would also like to thank other hon. Members for their interventions. I hope to address them all during my response. The anniversary of Storm Desmond—we had Storm Angus last week—is a timely reminder that the potential for flooding, and the devastating impact it can have, is never far away. It is worth reflecting on the purpose and value of Flood Re, which replaced the statement of principles—a series of agreements made by the Government and the insurance industry since the 1960s on the provision of insurance to those at flood risk.

However, the statement of principles had limitations. Under the statement, members of the Association of British Insurers agreed to make insurance available to domestic and small business properties in areas that were not at a significant risk of flooding. For properties in significant flood risk areas, the statement of principles provided an offer of cover only to existing customers, provided that plans were in place to reduce the risk within five years. There was no availability of cover for those most at risk if they had not historically had flood insurance or the risk was not being reduced. Importantly, the statement of principles did not provide for the affordability of flood insurance.

I would like to make some progress and then I will happily hear from my hon. Friend.

In the insurance industry, traditionally there has been an informal cross-subsidisation of the costs of flood risk, which is a common approach to managing risk in the insurance sector. However, commercial pressures and the availability of more sophisticated flood risk models have given rise to a trend towards insurers increasingly assessing local flood risk and imposing risk-reflective terms. Without Flood Re and with an immediate transition to fully risk-reflective prices in a free market, many households at high flood risk in the UK would probably experience a significant increase in their insurance premiums in the coming years. I therefore welcome the comments made by my hon. Friend the Member for Maidstone and The Weald (Mrs Grant).

I draw attention to my entry in the Register of Members’ Financial Interests. As my hon. Friend the Member for Carlisle (John Stevenson) elucidated, the Flood Re scheme has gone some way towards supporting communities, individuals and housing that is vulnerable to flood risk, but it is clear from the original legislation that it does not work in isolation. It works alongside flood defences not simply as a repair product but as part of a structure to build confidence in housing and industry in flood-affected areas. Will the Minister say a little about the flood protection the Government are introducing and how that will defend communities, particularly in areas such as the Medway?

I certainly hope to come on to that. To return to the genesis of Flood Re, the Government, working with the insurance industry, established the scheme to help householders at the highest flood risk who were blighted by not being able to access affordable insurance. It is expected to help about 350,000 households. Flood Re not only limits the price of flood insurance according to council tax band but limits the excess to £250. It ensures that all home insurers in the UK are part of the solution. It is a complex scheme, but it is a world-first and it is the fifth biggest reinsurance scheme globally and the second largest in Europe. There is much international interest in what we are doing.

Flood Re is providing relief for thousands of householders at flood risk and brings real practical and emotional comfort to many, as has been said. Fifty insurance companies, representing more than 90% of the market, now offer access and in its first six months of operation 53,000 households have benefited. This portfolio will build as the market matures, with Flood Re policies expected to grow in number over the next three years. I encourage hon. Members to advertise that to their constituents. Nevertheless, it is worth emphasising that a number of factors beyond flood risk determine any insurance quotation and it remains important for householders to shop around for the best deal.

I agree with the Minister and my hon. Friend the Member for Carlisle (John Stevenson) that the Flood Re scheme is a good one and has been successful, but does the Minister accept that there is more to do for businesses, particularly small businesses, in flooded areas such as York and Carlisle? When flooding hits, it has a huge impact on small businesses. Will she consider extending the scheme to cover businesses?

I intend to address that issue towards the end of my contribution. If I do not manage to do so in sufficient detail for my hon. Friend, I will be happy to have further discussions.

I stress that Floor Re is a transitional measure. It was designed with a 25-year lifetime to help householders at high flood risk to adapt to risk-reflective pricing. That sets the challenge of how collectively as a country we can bring down the risk and impact of flooding over the next 23 years. The Government are spending record amounts on flood defences, with a £2.5 billion six-year capital floods programme, which will provide better protection for at least 300,000 homes. My hon. Friend the Member for Tonbridge and Malling (Tom Tugendhat) will be aware of some of the protections, and I know that he is pressing for more for his constituents.

There is a growing understanding that, regardless of our significant investment in flood defences, a residual risk of flooding remains. Flood defences are not always appropriate, and where they are we have seen that they can be overtopped in extreme events, as happened a year ago. We need to work across the whole catchment area to slow the flow of water through natural flood management and to prepare for any flooding that does occur. As well as ensuring we have a first-class emergency response to flood events, there is much we can do to adapt our homes and businesses to become more resilient.

Only last week, I visited Warrington and saw at first hand a new flood defence scheme at Victoria park where work is still in progress. Back in 2013 and within two weeks of the first phase being built, the scheme prevented 200 properties from being flooded. That was fantastic for the residents, but reminds me of the need to help people to understand the residual flood risk that inevitably remains. It is important to take measures to try to stop water entering a property and to speed recovery. Returning home is increasingly important and relatively simple steps can make a big difference—for example, flood resistant air-bricks; raising sockets; and using tiles instead of carpet. Property-level resilience can play a significant role in making people and their property less vulnerable to the physical and mental impacts of flooding.

A few months ago, we published the Bonfield property flood resilience action plan in collaboration with the commercial sector. It explores how collectively business and Government can best enable and encourage better uptake of such measures for properties, including businesses, at high flood risk.

Turning to leaseholds, particularly long leaseholds, I have commissioned my officials to look at the nature and extent of the problems that my hon. Friend the Member for Carlisle described, as we need to look at them in more detail. He will be aware of the wider issue of small leasehold property, to which he referred. The insurance industry regularly informs us that for, the most part, affordable commercial insurance and contents insurance for individual leaseholders is available through Flood Re, but there are examples of individuals and leasehold properties with more than three residential units struggling to access affordable business insurance. Likewise, there are examples of residential buy-to-let properties not being covered and owners finding it difficult to obtain insurance.

Evidence is building and the challenge is not easy. Much consideration was given during the creation of Flood Re to whether to include leasehold properties. From a practical perspective, insurers determine whether an individual property is at high flood risk on a household-by-household basis and can allocate the cost using a simple domestic insurance model. For leasehold properties, buildings insurance will often cover numerous dwellings, which may well have different levels of flood risk. It would be difficult to establish a consistently fair approach to how lessees should cover that risk.

There are also considerations of principle. With Flood Re, when the insurer has a direct relationship with the homeowner, the competitive market gives us confidence that the benefits provided by the scheme will reach the households for which it is intended. It is not clear that a similar scheme for leasehold properties would achieve this.

I have been saying for some time that there is good news. I am very pleased that yesterday the British Insurance Brokers Association announced the launch of a new commercial product designed to help small businesses at high flood risk to access affordable insurance. The scheme will also be open to leasehold properties. It will no doubt help some, and I hope it will help the vast majority of those who are struggling. On tenement housing in Scotland I was not aware of the difference in application, and I will certainly ask my officials to add to that. Should there prove to be a need for additional action, I remain open to exploring what can and should be done.

I have great sympathy with what my hon. Friend the Member for South Ribble (Seema Kennedy) said and I am happy to explore it further. There is a similar challenge, in that that is not quite as straightforward as individuals’ domestic dwellings, but let us look at it and see.

Flood Re is not a panacea. There is no evidence of a systemic problem, but I recognise that there is a real problem for the individuals, businesses and communities involved. I am particularly concerned about smaller businesses that cannot easily move premises. I hope that using granular postcode data and recognising the benefit of property level resilience measures, the new products from insurers—as of next week, I believe—will enable more small businesses to obtain affordable insurance.

In parallel, the Department for Environment, Food and Rural Affairs is working to understand the nature and extent of the problem. I thank the hon. Members who have shared examples with me and encourage businesses to work with us to help the Government to have a more comprehensive picture of the challenges that they face. Where there is a clear need for further action, the solutions are varied. Extending Flood Re to cover businesses is not possible, because the scheme is predicated on a domestic rather than commercial insurance model. Equally significant is the question of who pays to subsidise profit-making businesses, which are often more able to move premises than households.

My hon. Friend the Member for Carlisle asked about Flood Re and the ongoing concern. Flood Re will be reviewed every five years. It needs to be given time to work, but there are separate policy questions that we need to look at with regard to scope. Flood Re will continue to interpret legislation and I assure hon. Members that we are in regular contact on it.

People should be aware that Flood Re does not extend to properties built during or after 2009. Planning law means that properties built in a high flood-risk area should already be resilient to flooding. Extending Flood Re to cover these properties would only incentivise unsuitable development. That is why we have not done that.

Will the Minister, as part of her ongoing review, review the level of premiums that are charged under the British Insurance Brokers Association scheme in relation both to leasehold properties and to those of small businesses? The danger of a finely targeted, granular approach is that some may find the risk premium unaffordable.

The right hon. Gentleman will be aware that the principle of using taxation to support citizens is well established. The principle of forcing businesses to subsidise one another is not established and would be a significant difference.

The product is coming out formally next week and we need to see how it works. There are other models that will be encouraged and this might help the community centre to which my hon. Friend the Member for Carlisle referred to think about adding extra insurance against the excess, if that excess is deemed to be too high to manage without additional protection.

I urge hon. Members to make sure that their constituents are aware of the Flood Re scheme and the benefits it can bring. I encourage hon. Members to make sure their constituents are flood aware and prepared for flood events. That could be signing up to the flood alert service and making properties more resilient. Touch wood, Mr Hollobone, I hope that we do not have an incident similar to Storm Desmond last year. However, we are not relying just on touching wood. I praise the Environment Agency for all its work in the last year, working alongside councils to make sure we are better prepared for this winter. I assure the House that this Government are committed to continuing to protect hundreds of thousands more homes in the coming years.

Question put and agreed to.