Committee (3rd Day)
Relevant document: 20th Report from the Delegated Powers Committee.
154: After Clause 50, insert the following new Clause—
“Onshore oil or gas activities: effect on water environment
In Part 1 of Schedule 5 to the Environmental Permitting (England and Wales) Regulations 2010 there shall be inserted after paragraph 13—“Onshore oil or gas activities—effect on water environment13A (1) Without prejudice to the operation of Regulation 35(2) and paragraph 5(1)(d) of Schedule 10 and of Regulation 35(2) and paragraph 7(j) of Schedule 20, the regulator shall refuse an application for the grant or variation of an environmental permit or for the transfer in whole or in part of an environmental permit if—
(a) the regulated facility to which the application for or transfer of the environmental permit relates is to be carried on as part of an onshore oil or gas activity; and(b) the regulator is not satisfied that the applicant or the proposed transferee has made or will make adequate financial provision for preventing or mitigating pollution of the water environment, by ensuring all of the following—(i) operation of the regulated facility in accordance with the environmental permit;(ii) compliance with any enforcement notice or suspension notice or prohibition notice or mining waste facility closure notice or landfill closure notice which may be served on the applicant or transferee by the regulator under these Regulations;(iii) compliance with any order of the High Court which may be obtained against the applicant or transferee under Regulation 42 for the purpose of securing compliance with any of the notices listed in sub-paragraph (ii);(iv) compliance with any order of any court issued under Regulation 44 against the applicant or transferee; and(v) recovery by the regulator of its costs upon any exercise of its power against the applicant or transferee under Regulation 57;(c) for the purpose of this paragraph “onshore oil or gas activity” means any activity for the purpose of exploration for or extraction of onshore oil and gas;(d) for the purpose of this paragraph “adequate provision by way of financial security” means financial provision which is sufficient in value, secure and available when required.”.”
My Lords, before we get on to this afternoon’s main business of flood insurance, I have down one amendment, relating to environmental regulation, which concerns the effect that fracking will have on the water supply system. This has been a major concern in another place for a number of Members of Parliament, who have local problems about the impact that any major expansion of fracking might have on watercourses and water supplies.
I do not intend, this afternoon, to open up the whole debate on the importance or otherwise of fracking, what its effects might be and whether we could repeat, in the UK and Europe, the experience of the United States. For what it is worth, I doubt that it will be transformational, but it will be important and will produce some significant gas and oil in this country. That will need to be tightly regulated by the Environment Agency, the HSE and local planning systems. In particular, water supplies and watercourses will need to be protected and, if anything goes wrong, fracking companies will have to be seen to be clearly liable.
On the relationship between fracking and water supplies, there are three main issues. First, there could be pollutants released, potentially, into water systems and aquifers by the fracking process—that is, the chemicals contained in the fluids that are used in the hydraulic fracturing process. There are also naturally occurring contaminants which could be released from the shale itself, including naturally occurring radioactive contaminants. There could also be fugitive emissions released into ground-water, particularly of methane. All of those could have serious effects on water quality, ecology, habitats and water supply. To a greater or lesser extent, all have been experienced in the United States, although on a limited basis.
Secondly, if the fracking industry develops on any scale, for the purposes of shale extraction fracking will also require major abstraction of water from the system. As we have already stressed in previous days in Committee, the urgency of reform of the abstraction system needs to take into account the impact of mass fracking on abstraction levels and hence on already stressed catchments. This is linked to amendments we discussed the other day. For example, if fracking companies take up the headroom in existing licences in particular catchments, then a lot of catchments could be in serious trouble, if they are not already.
Thirdly, there is the requirement for the cleaning and treatment of the water that has been used in fracking, which will need to be decontaminated.
Amendment 154 really focuses on the first of these effects, and to some extent the third, but all three are important for the water system and need to be taken into account. It is vital that we protect ground and surface water. For example, in the south of England, 70% of the water supply depends on healthy aquifers. This includes drinking water as well as water for industrial and agricultural use. Frankly, the American experience, though variable, is not completely reassuring. In another place, my colleague Joan Walley quoted an example from Pennsylvania, where methane was found in 82% of drinking water samples. We need to be reasonably confident that our regulators, the Environment Agency and the Drinking Water Inspectorate, will operate a much more effective regulatory regime here in the UK than has been operated in certain parts of the United States. Even so, and with a fairly high degree of confidence in our regulators, disasters—or at least leakages—may well happen.
We have a history of earlier energy sources to instruct us: the legacy of coal mining and, in a somewhat different vein, the earlier phases of the nuclear industry. Not only can pollution occur, we have seen the inability of the organisations that produced the pollution to finance the decontamination and the clear-up, which have required very substantial sums. We all support the “polluter pays” principle in theory, but we also have to ensure that the polluter can pay. In both coal and nuclear, it has in effect fallen to the taxpayer to pay for the clear-up over the past few decades, and that is still going on.
The fracking of shale gas is likely to benefit the companies involved with substantial tax concessions and, whether rightly or wrongly, the companies involved expect to make substantial profits from fracking. Those companies really should be required to show not only that they will make their best efforts to meet all the environmental quality and safety regulatory requirements but also that, if something goes wrong, they have the ability to cover potential liabilities.
The proposed clause would amend the environmental permitting regime to include as a condition that companies intending to engage in fracking show, right at the beginning, that they will have the funds to meet clean-up costs, should pollution incidents occur to ground-water, aquifers and water supplies. This terminology is not that different from existing financial requirements under the landfill regulations and landfill directive, which are administered by the Environment Agency. The new clause would allow the regulator to refuse a permit,
“if … the regulator is not satisfied that the applicant … has made or will make adequate financial provision for preventing or mitigating pollution of the water environment”.
Surely that is the minimum that our communities and our water supply system should expect from those who are involved, or potentially involved, in fracking. If the companies cannot afford such financial provision, they really should not be in this business. I beg to move.
My Lords, I have a question for the Minister in this general area. Does he feel that this proposed regulatory environment would cover cases in which fracking companies pipe sea-water on to land and then either dispose of it on land or, indeed, discharge it back into the sea? If it does not, it should.
I have a brief comment on what the noble Lord, Lord Whitty, said. To be fair, almost any ground-water or well-water that is drawn in regions that are underlain by coal measures—and this is predominantly the case in Pennsylvania—have some methane in those waters.
My Lords, as the noble Lord, Lord Whitty, has explained, Amendment 154 would require onshore oil and gas operators to provide financial security when applying for an environmental permit so that funds would be available to deal with any water pollution incident caused by the operator. The amendment would impact on both the conventional and unconventional oil and gas sectors. It would address any pollution that they caused to the water environment but not any other damage that might be caused by their activities.
We want a successful industry in this country—an aspiration supported at Second Reading—to provide us with an important source of gas for our future, but it is vitally important that it is safe. We already have a well established UK conventional onshore oil and gas industry that has happily coexisted with local communities, in some cases for half a century or more. This has been achieved not least because the industry has maintained a good record of environmental responsibility and competence. The existing controls and the application of good operational practice have served us well to prevent pollution from onshore oil and gas activities and to tackle in an appropriate way any problems that emerge.
The Department of Energy and Climate Change assesses as a matter of course whether a company has sufficient funding for its planned operations prior to awarding any licence. It also checks at the drilling stage and, where relevant, at the production stage that the company has appropriate insurance. Similar financial competence checks are also carried out by the Environment Agency as part of the permitting process. In the event of serious damage to surface or ground-water, the Environment Agency and Natural Resources Wales have powers, under the Environmental Damage (Prevention and Remediation) Regulations 2009 and the equivalent Welsh regulations, to serve a notice requiring that the polluter pays to clear up the pollution. If a significant environmental risk becomes apparent, the Environment Agency has the authority to stop the activity. These powers apply to a wide range of operations and activities undertaken by different industries. I do not think that it would be appropriate to create any specific provisions for the oil and gas industry.
However, the Government are aware that there are widely felt concerns about the capacity of companies exploring for shale gas to tackle any liabilities that might arise. This is the concern that the noble Lord, Lord Whitty, is pointing to. Therefore, I am pleased to inform your Lordships that the Department of Energy and Climate Change and the shale gas industry are working to put in place a robust scheme that would cover liabilities even if the relevant operator is no longer in business. They are also in discussion with leading insurers about proposals to build expertise and capacity in the insurance market to facilitate the development of products specifically appropriate for unconventional operations, which in turn could facilitate the development of an industry-wide scheme. In addition, while we already have a robust regulatory framework in place, I can confirm that it will be reviewed and refined as appropriate as we move towards the production phase. The question of the noble Lord, Lord Oxburgh, will be addressed in that process. This regulatory review will include the question of environmental liabilities in the wider sense, not solely relating to water.
I am sure that noble Lords will agree that these two initiatives, taken together, constitute a sensible approach towards ensuring that liabilities are covered in a comprehensive and proportionate way, rather than taking what might be a rigid legislative approach on a piecemeal basis. I hope that this news provides the reassurance that the noble Lord, Lord Whitty, needs that the Government are taking the right steps to ensure that liabilities are dealt with appropriately, and that he will feel able to withdraw his amendment.
My Lords, I thank the Minister for that. It is a degree of reassurance. I thank the noble Lord, Lord Oxburgh, for expanding the area of concern into the issues of the effect that bringing sea-water on land for use may have on watercourses and the possibility of contamination of the sea-water itself.
There is the potential for such a widespread effect on the water system that I feel justified in bringing this amendment before the House. I am pleased to hear the Minister say that the industry, the insurers and the Government are looking at a scheme. This obviously recognises the very widespread concern in the country about the possible impact of fracking which, he is right to say, is wider than the issue of the effect on the water supply system.
I am still slightly concerned that we might get into a situation where, if the industry develops to the degree that many of its advocates suggest is possible, we end up with a substantial problem—a problem that could end up on the taypayer’s desk or bank account. In the nuclear industry we have provided for such a possibility for current operations, although obviously there is a huge legacy that has not been provided for and a huge bill for the taxpayer as a result. We have done the same on a much lesser scale in relation to landfill. We could probably also establish a regime in relation to fracking to ensure that this liability was covered. However, the Minister has indicated that there is some progress. I will watch this space, as I am sure will others. At this time, I beg leave to withdraw the amendment.
Amendment 154 withdrawn.
Clause 51: The Flood Reinsurance Scheme
154A: Clause 51, page 107, line 7, leave out “and”
My Lords, in the face of the desperate flooding challenges that many in our country are now facing and look set to face in the future, I strongly welcome the proposals for Flood Re, which we are now coming on to debate and which will provide affordable flood cover for all households. My Amendments 154A, 154B, 156A and 156B give Flood Re, which will be a private company in receipt of public money, a duty to act in the public interest and extend its remit to help deliver a more resilient future in the face of flooding, working with other bodies to achieve that where appropriate.
The Flood Re scheme will benefit householders at risk of flooding. However, if flood risk management is not significantly improved over the lifetime of the scheme, we will be in no better a place after 25 years than we are now. The adaptation sub-committee of the Committee on Climate Change—and I am glad to see the noble Lord, Lord Krebs, in his place today—in its policy note to the Government last month makes it clear that significant increased investment in flood-risk management is required, as well as in flood defences, if the levels of risk are to be maintained, let alone reduced.
Flood Re could raise awareness of flood risk, direct policy holders to advice and support and, crucially, if sufficient reserves are generated, it could support measures that individuals or groups can take to reduce flood risk. Surplus funds could, for example, pay for property-level measures, such as flood gates and air brick covers, which typically cost £5,000 per property. Government grants of between £2,000 and £4,500 are available, so Flood Re could, for example, meet the difference. It would be a sound investment, given that every £1 invested in property-level protection typically achieves a benefit of £5 or more; or it could contribute towards the cost of Environment Agency schemes that do not justify full government grants under the partnership funding approach. Funding from Flood Re could make the difference between a flood defence scheme going ahead or not, which would be worthwhile if it were to protect some of Flood Re’s highest-risk customers.
To determine what Flood Re could do, it is critical to know how any surplus funds will be defined and what will happen to them. The evidence of a Defra stakeholder presentation on Flood Re, in a slide entitled “Flood Re’s exposure to claims”, gives a median-loss scenario of £65 million in claims per year. That means that it could have at least £100 million in reserves at the end of the first year. Defra’s final impact assessment for Flood Re, in table 5 on page 20, states that, over the life of the scheme, it should on average make an annual surplus of £27 million. This calculation is based on Flood Re’s expected loss scenario which takes account of the low-probability/high-cost flooding that could take place during the 25 years for which the scheme is operational.
Either way, Flood Re is likely to hold significant sums of public money that could be used to help manage down flood risk. This would help save everyone money: high-risk households, other policyholders and Flood Re itself. This could be achieved without the main £180 million levy needing to be increased because it could just be pursued if Flood Re were in surplus. Over the 25-year lifetime, this would make a material difference to the number of homes at significant risk while helping those households secure affordable flood insurance on an ongoing basis once Flood Re is withdrawn. It is therefore important to know how the Government expect any surplus to be defined, in order that it might support such an approach. I look forward to hearing more from the Minister on that in his response.
We need legislation that expresses how Flood Re can help to deliver social objectives without claiming that Flood Re can or should solve all flood risk management issues. I hope that I have made clear what I am seeking for Flood Re to achieve, and the wording of these amendments is an attempt to do just that. I beg to move.
My Lords, I support my noble friend Lady Parminter and strongly welcome the Government’s proposals on the Flood Re scheme. Getting insurance in high-risk areas is of fundamental importance to the individuals affected; the outcome of the negotiations and planning that have gone into the scheme is very important. All those who have taken part in that should, in my view, be congratulated.
However—I refer here specifically to Amendments 154A and 154B—Flood Re cannot be just about reinsurance: it also has to be about reducing flood risk over time by getting householders who have been flooded and claimed on their insurance and householders who are at high risk to invest in better flood protection. As my noble friend Lady Parminter said, in 25 years’ time we should not be in a position where we have not made any progress in flood protection and end up simply repeating the process. Therefore, Flood Re should not be seen simply as a financial transaction providing a means of reinsuring properties at risk, or deemed to be at risk. We have to go a step further and provide incentives for people to engage proactively in flood risk management. There are clear benefits in this for the insurance industry: better protection will lead to lower total claims. Householders will gain greater security from flooding.
Amendments 156A and 156B—which are intended to be probing amendments—are about the duty of the Flood Re scheme administrator to co-operate with all those bodies that have an existing duty to co-operate under the 2010 Act. It is very important to put this point in the Bill because, as I said, the scheme should not be seen to have just a financial role: it has to be about resilience as well. The introduction of the FR scheme administrator means that strategic interventions can be undertaken. For example, each household in a given high-risk area might be with a different insurance company, so developing strategic solutions involving the insurance industry, which has not so far been possible, now could be. Examples are in data sharing: competition rules have meant that it is not possible to get access to insurance claims data to identify trends in the scale and frequency of flooding. Having this data available through the scheme administrator, alongside public information held by the public agencies and the water companies, could be crucial in making investment decisions to reduce flood risk and, of course, future claims. The FR scheme gives us an opportunity to enable this information to be made available for high-risk areas and we need to make sure it happens as part of this Bill.
My noble friend Lady Parminter referred to the Committee on Climate Change—and we might hear more about that shortly—but the estimate that there could be up to 190,000 homes that could have their flood risks reduced through measures to protect them is a very important factor. Flood Re could be charged with taking a more proactive approach to encouraging and supporting those people in high-risk areas to protect themselves better. As my noble friend Lady Parminter has made clear, there could be systems of loans and investments as well to assist householders.
There is a danger in the proposals in the Bill that people in high-risk areas will simply be satisfied with having secured reinsurance. They might not fully understand the benefits of actually undertaking flood prevention work. They may simply end up accepting the reinsurance at the price they have to pay. There is a further factor that not everybody, even in a high-band property, is cash rich. It could be that, for some, the flood protection works that they would have to undertake would be too costly.
The benefits to the insurance industry of all four of these amendments are clear. It should reduce the level of claims it receives, and therefore the cost of that. There is a major gain for individual householders in that they will be encouraged—and able—to secure greater investment in flood prevention works to their properties. Therefore, I hope that the Minister understands, when he comes to reply, that these four probing amendments are all very positive in their approach in that they build on the excellent work that the Government have done with the insurance industry. However, let us work out ways in which we could do a little more to encourage flood prevention to be undertaken, and that greater resilience, as part of the Flood Re scheme.
My Lords, I, too, am very interested in this amendment, which has been drawn to the attention of people who live in my former constituency, in particular in the town of Keswick, which noble Lords may recall was the victim of substantial flooding a few years back.
I received a letter from Mrs Lynne Jones, the chair of Keswick Flood Action Group, one of the bodies that was established following the floods some years ago. I will read her letter to the House, because it comes from the front of the battle against flooding, from people on the ground who have to deal with this every day. She writes:
“My particular concern has always been that there is no encouragement or independent advice to reinstate properties in a more flood-resistant, resilient manner after a flood. It can be considered as betterment. Insurance companies have to reinstate properties with insulation which satisfies government legislation, whether there was insulation before or not. However, there is no requirement to consider solid waterproof floors as opposed to floorboards or a rewire from the first floor down, or the many other measures which can make flood recovery that bit less stressful, prolonged and expensive should the worst happen”.
In other words, people on the front line in this battle against flooding are now considering to what extent this scheme can be adapted in a way that incentivises investment not just in the solution of the immediate problem but in remedial measures which can affect claims in the future.
My Lords, I support the amendment in the name of the noble Baroness, Lady Parminter. As will be apparent, the amendments that I will bring forward shortly are in the same vein. They reflect the points I made in a letter to the Secretary of State on 22 November 2013, in which I said:
“The Flood Re scheme offers the opportunity to strengthen incentives for the uptake of household flood protection measures but it is currently not designed to do this. The consequence is that Flood Re costs will be higher than they need to be, at the expense of householders funding the programme through the industry levy”.
I declare an interest as the chairman of the adaptation sub-committee of the Committee on Climate Change.
As this discussion has made clear, there is a real opportunity here and this is a helpful and supportive proposal. I will shortly describe my amendment, which would redesign Flood Re to help it, as has been said, to do two things: to provide cover for householders at risk and, at the same time, help to reduce those risks over the years ahead, so that when Flood Re comes to an end householders do not drop off a cliff after 25 years.
My Lords, I am very nervous about these amendments, probing as they are. Flood Re has one aim: to provide flood insurance for those people who cannot buy it at the moment. The first year or two will be very difficult until it has built up its reserves, provided that there are not too many claims in those early years. However, I am very nervous about the suggestion that Flood Re ought to spend money on flood-resilient activities. What happens in 10 years’ time if we have another horrendous year of rain—floods all over the place—and these households go to Flood Re and say, “I’ve now got a claim, will you pay it?”. What happens if Flood Re replies, “I’m so sorry, I have paid it all out on building a dam here and there”? I do not think it is the right answer to get Flood Re to pay money out other than for genuine flood claims.
My Lords, I have a great interest in this group of amendments. I certainly understand the geometry that lies behind it, particularly that outlined by the noble Lord, Lord Campbell-Savours. I probably follow the noble Earl, Lord Cathcart, in this. As I understand it, Flood Re will have significant start-up costs. Also, the Environment Agency’s investigation and collation of information from the hazard risk assessments, which it is charged with carrying out, will be a draw-down on the Flood Re fund. That means that, in the early years, there may be significant sums taken out of the pot. I understand that the intention is that the Government should put in plan B configurations to deal with that eventuality. However, given the sporadic and capricious nature of severe flooding, we do not have any time to waste in putting measures together to improve resilience and protect properties where they can be protected.
I have a technical interest in this: I am a practising chartered surveyor and property valuer. I am also involved in the parish and town council sector, as is well known. I can see the rationale behind an early start for communities and individual property owners coming together to create robust schemes. We need to do that as soon as the present flood waters have died down, as I hope they will. Time is of the essence, because we do not know when the next flood will come. There is a conundrum between the build up of the pot of Flood Re on the one hand and spending funds on resilience and protection on the other. In a later group of amendments, I will say a bit more about Flood Re, which is intended to cover a very limited and narrow range of circumstances. I will explain why I think a larger problem of an entirely different magnitude is lurking here.
We need to make a start. On the basis that the economy is improving, this is exactly the time when these investments need to be made. I will be very interested to hear what the Minister has to say about the pot, how it will be funded and how we get the early years’ work put in place. Like the noble Earl, Lord Cathcart, I obviously would not want to see the pot devoted to one large project to the exclusion of all others. I am sure that would not be the case. If we do not get this right, the credibility of FR is likely to falter. I think that is something on which the Minister can elaborate.
My Lords, one of the great advantages of modern technology is that you can discover something you did not know anything about while a debate is taking place. As this debate started, I chose to look at a Defra website on obtaining flood insurance in high-risk areas. At the top of the main page, a number of participants are indicated: BIBA, the Environment Agency, Which?, ABI, the National Flood Forum and Defra. Flood Re does not appear there yet. Can the Minister say how far the department has already gone down the road that is suggested here? This website, which contains a great deal of other valuable information on the steps you could, and should, be taking, already exists. Presumably, at some point Flood Re will be fitted into the whole arrangement. My only anxiety about the Flood Re participation is that indicated by my noble friend—namely, that against the present background, I only hope that there is a surplus in the early years because the fact is that we could have a situation whereby, far from having a surplus in the early years, we have a substantial loss. However, as there is a website and as a good deal of advice is being given by the department—I think it is rather good advice—perhaps my noble friend will indicate what the department’s overall approach is and how he sees Flood Re fitting into what is already going on.
My Lords, in her opening remarks, the noble Baroness was correct to set this matter in the broader context of where we are now, and have been in recent years, with instances of serious flooding in Somerset this week, possible serious flooding in Surrey by the end of the day, that which occurred in Keswick not long ago; and the resources that are needed to ameliorate that position in the long term which are, essentially, the resources that the Government are putting in. We will no doubt return to that issue at some stage in these proceedings. However it raises the question of whose responsibility this is. I have slight reservations about these amendments in that regard. The public authorities and the Government have responsibility for ensuring that adequate resources are available for flood defence and catchment management to mitigate the impact of flooding and insurance and reinsurance schemes can help through their normal operations. However, insurers can insist on mitigation or flood recovery measures along the lines mentioned by my noble friend Lord Campbell-Savours as a condition of renewal or extension of policy cover or as a deduction, if you like, from compensation. That is a normal insurance operation.
These amendments seem to be saying that Flood Re would take on some public responsibilities and social objectives and have executive responsibility for delivering flood limitation measures. It is important and right that Flood Re should co-operate with the public authorities, landowners and everybody else in this area, so in that sense I support Amendment 156B. However, it is also important that we do not transfer the risk from public authorities and property owners to an insurance system which, at the end of the day, is viable only if it takes a cut from all policyholders, including those whose properties are not at all at risk of flooding.
This is a difficult issue. The noble Baroness referred to public money. In one sense public money is involved because we are legislating for the system and the Treasury will, therefore, regard the expenditure involved as public money, but it is not really public money—it is the policyholders’ money. At the end of the day, you cannot place too many responsibilities on the Flood Re operation when it is dependent on individual households and businesses paying into it for insurance purposes.
It may well be that a surplus is generated and that the assessment of who pays for flood defence is looked at more broadly. Clearly, there are limitations on public expenditure and expenditure on better flood defence and catchment management could be met by those who are the most direct beneficiaries of it. You could argue that insurance companies themselves benefit from fewer claims as a result of more effective flood defence, but that is a slightly wider argument than placing the statutory responsibilities for which these amendments ask on to Flood Re itself. I think that that is slightly going round the back door.
As I say, I am slightly torn on this issue because I agree with a lot of what the noble Baroness and the noble Lord, Lord Shipley, said. However, I think that we would probably place too much responsibility on Flood Re if we adopted all these amendments.
My Lords, I am grateful to my noble friend Lady Parminter for her amendments regarding flood resilience and Flood Re’s role in that matter, and to all noble Lords who have spoken. Regarding Amendments 154A and 154B, I agree with my noble friend Lord Shipley that we need to tackle the root cause of the difficulties with the availability and affordability of flood insurance—the flood risk that households face. The coverage of the tragic events of the past couple of months, which my noble friend Lady Parminter mentioned, have brought the full impact of this home to us all. I thought that the letter read out by the noble Lord, Lord Campbell-Savours, set out the problem very well.
Households benefiting from Flood Re need to understand both their flood risk and the likely impact of the withdrawal, over time, of the subsidy on their future premiums. I hope that noble Lords will be reassured to hear that we have agreed with the Association of British Insurers the principle that insurers will be required to provide such information to customers when a property is ceded to Flood Re and at the point of a claim. I hope that the statutory requirement for the Flood Re scheme to manage, over the period of the operation of the scheme, the transition to risk-reflective pricing of flood insurance for household premises also offers some reassurance.
The ABI has now come forward with draft proposals for ensuring that the correct incentives are in place to drive uptake of resilient repairs after a flood, particularly for those properties subject to repeat flooding. We are still agreeing the detail of this approach and I hope to have more to say on Report. Encouraging households to become more resilient over the period of the scheme will help to reduce the impacts of subsequent flooding.
Turning to Amendment 156A, the subsection that my noble friends seek to amend has been drafted in such a way to provide firm pointers as to what the Flood Re scheme administrator would need to have regard but is also intended to allow for a degree of flexibility that may be needed as the scheme is finalised. I assure noble Lords, in the strongest terms, that the Government are absolutely committed to taking forward Flood Re, together with the insurance industry, and that both parties are working very hard to achieve this.
We expect the administrator to act responsibly in its management of the scheme throughout its life and we have every intention of ensuring that it discharges its functions in a proper manner, supported by the duties we will place in secondary legislation. The regulations made under Clause 54 will be subject to public consultation and we are currently considering carefully the Delegated Powers Committee’s recommendation that regulations made under this clause should be subject to the affirmative procedure. I trust that this assurance puts on the record our intentions in this regard.
As regards Amendment 156B, my noble friends are right that co-operation between Flood Re and flood risk management authorities will be important, in particular should Flood Re wish in the future to commit any of its resources to supporting flood risk mitigation measures. Clause 54 provides for Flood Re to share information held by it with the Environment Agency, its equivalents in devolved Administrations and any other bodies specified in regulations. It also provides for Flood Re to have a duty to act in the public interest, so where it is in the public interest for Flood Re to co-operate with other risk management authorities, it would be expected to do so.
Under the Flood and Water Management Act 2010, flood risk management authorities have a duty to co-operate with each other in the exercise of their flood and coastal erosion risk management functions. This is because the causes of flooding can cross organisational boundaries and responsibilities. For example, flood risk management schemes to protect one area may make the problem worse elsewhere if there is not a partnership approach to developing solutions. Flood Re will not have an operational role in designing or implementing flood risk management schemes. As I think the noble Lord, Lord Whitty, suggested, that would be beyond the scope of Flood Re and would require different skill sets. Flood Re will therefore not have the same degree of interaction with the risk management authorities that they will have with each other. I am not convinced that there is a need to extend the requirements based upon the Flood Re body.
Perhaps I may say to my noble friend Lord Cathcart that while directly managing flood risk is not the purpose of Flood Re, it is nevertheless vital that Flood Re does not just deliver affordable flood insurance. It should also contain the right incentives for householders and insurers to put in place the necessary measures to become more resilient, since otherwise the effective price limits in Flood Re may remove some of the financial incentive to take such action. He has suggested—the noble Earl, Lord Lytton, also asked about this—that Flood Re will need to build up its reserves, which is of course right, but it will have access to the proceeds of the levy and be able itself to take out reinsurance. Can I offer to meet noble Lords before Report, on which occasion I shall of course be happy to provide an update? Perhaps I could also address the point made by my noble friend Lord Crickhowell at this stage. I shall come back on Report to noble Lords with more details of how those who flood repeatedly might be treated. For the reasons I have outlined, I hope that I can persuade my noble friend to withdraw her amendment.
I thank the Minister for that helpful response and I thank Members around the Committee who have contributed to this debate. It has helped to spell out in more detail what we are all hoping to achieve for Flood Re. We do not expect it to be able to answer all the social objectives in terms of flood risk management, but we should accept that it is not just a flood insurance vehicle, important and critical though that is. It will also need to provide the necessary incentives to transition to a stronger place in the future. The wording of the amendment may not be ideal, but at least it has facilitated this debate. I hope that noble Lords are not disappointed in my having brought it forward in that light.
I thank the Minister for agreeing to meet noble Lords between now and Report. That will be helpful because there are still questions about the surplus and how it will be defined. The comments made by my noble friend Lord Cathcart and others remind me that we are not guaranteed surpluses with Flood Re; this is only what we are saying if those surpluses are achieved. I am happy to learn that the Minister intends to say more on this issue at the next stage. On that basis, I beg leave to withdraw the amendment.
Amendment 154A withdrawn.
Amendment 154B not moved.
155: Clause 51, page 107, line 20, at end insert—
“( ) Within 12 months of this Act coming into force, the Secretary of State must publish and lay before both Houses of Parliament a report on the ability of businesses in areas of high flood risk to secure affordable insurance cover.”
My Lords, I shall start by echoing the view that Flood Re is a welcome scheme, and I congratulate the Minister, his colleagues and the industry on introducing it. The scheme is to be supported in principle, but the devil may be in the detail. Other amendments grouped with mine allow the Committee to consider those who will be excluded from Flood Re, their ability to get insurance, and the costs of such insurance. Mine is a probing amendment but, that said, it is important in that it focuses on the significant absence of much-needed support to SMEs in the proposed Flood Re scheme.
Under the current provisions, small businesses of up to 49 employees are covered under the statement of principles. The Bill before the Committee proposes a new scheme, Flood Re, which is substantially built on the statement of principles. However, Flood Re provisions extend only to domestic properties and offer no protection at all to any businesses except a category called “micro-businesses” at risk of flooding. This is a really important distinction between SMEs and micro-businesses. My noble friend the Minister may be able to clear up exactly what that distinction is when he comes to sum up.
The critical point that I wish to make is that small businesses are key to economic growth. The importance of flood insurance has been highlighted by recent adverse weather, and removing the protection for small businesses from the statement of principles leaves them vulnerable to very significant increases in insurance premiums and even facing the possibility of being unable to afford flood insurance. This would be disastrous for many small businesses, including the shops battered on so many seafronts recently, village shops and businesses in the heart of stranded local communities. The need for affordable flood insurance in high-risk areas is essential to these small businesses. I urge the Government to ensure that an appropriate form of flood provision for small businesses is available.
Of course I appreciate that businesses reflect a different risk from residential properties and as such Flood Re may not be an appropriate form of protection for them. However, I very strongly argue that some provision in this area is required. Small shops are more vulnerable to the effects of flooding compared to their larger competitors, with fewer resources to fall back on and less power to negotiate insurance provision. Many small shop owners have no greater knowledge or expertise than domestic customers. Small shops are at the heart of many communities. If they recover slowly from flood events, it can have a significant knock-on effect for the wider community. I believe that government-supported flood insurance provisions should cover all small businesses previously covered by the statement of principles, especially those dependent on the locality for trade and which, by their nature, support communities. This view is supported by the National Flood Forum and indeed the Association of Convenience Stores, whose campaign I support. Proposals to exclude small businesses are contrary to other government measures, including small business provisions such as those seen in the energy markets.
As I have stated, I accept that this scheme will cover micro-businesses operating out of domestic premises but not the wider small business community. I am concerned that this decision will lead to small businesses in areas at risk of flood being subject to exorbitant costs to secure insurance. The Federation of Small Businesses has recently shown in its research that one in five small firms was affected by flooding last year alone and I am sure that that figure will be seen to have increased recently. The National Flood Forum has argued that:
“Flood Re should cover all businesses run from a home”.
It goes on to argue that:
“Small businesses should be included in Flood Re or alternative provided”.
Equally, the Joseph Rowntree Foundation has emphasised its concern about how repeated flooding could affect insurance premiums for small businesses. It suggests that consideration should be given to the implications of costly insurance for the future operation of businesses in high-risk areas, especially in small communities where they may not only provide an important economic function but are central to the functioning of their community.
Finally, I am pleased to report that London Councils supports this amendment. In some key areas of London, businesses are at risk of flooding as much as households. It is important that small to medium-sized enterprises and third-sector organisations, particularly those at surface level on our high streets, have access to affordable insurance cover. London Councils points out that flooding can devastate the economy of London’s high streets, many of which contain SMEs and charity shops. They are affected by damage not just to property but also to stock, and they can take a long time to recover. The flood hazard and risk maps published by the Environment Agency in December last year show that in the Thames area more than 166,000 non-residential properties are at risk of flooding, nearly 76,000 of which are in London. A significant number of these non-residential properties are small businesses. Bearing in mind all these representations, I beg to move.
My Lords, at Second Reading I welcomed the Bill but outlined some concerns. I am extremely grateful to my noble friend the Minister both for the remarks he made during that debate and for the correspondence I have received since then. Indeed, he was able to alleviate a number of my concerns. However, there is one area where I still have a slight concern, which relates to the effect this legislation will have on small businesses.
At Second Reading I said that since small businesses will be ineligible for Flood Re, they will therefore be afforded less protection than in the statement of principles by which they are covered. In his correspondence to me, my noble friend the Minister said that it was the belief of the Government that there was not sufficient evidence to justify intervention in relation to small businesses. However, I believe that more should be done to protect our valued SMEs, many of which operate under tight budgets and may be unable to obtain affordable flood insurance. My noble friend the Minister has also said that it was his belief that SMEs were more able to protect themselves from flooding. Again, I point to the issue of cost here. Just as many SMEs struggle with the cost of insurance, they also struggle to afford to put in place measures to protect their businesses and livelihoods.
I welcome the Minister’s remarks that this issue will remain under review but I feel that this does not go far enough. If nothing further can be done to assist SMEs as part of the Bill, the amendment tabled by my noble friend Lord Moynihan could at least assist them in the future. In fact, it would benefit both the Government and SMEs because of the extra clarity it would bring. It would provide a mechanism to formally review the ability of businesses to take action to reduce flood risk and access flood insurance.
The conciliatory manner in which this Bill has progressed is most welcome and I would welcome anything further the Minister has to say on this issue. Again, I support the Bill and would like it to succeed, but suitable measures must be put in place in order that everybody gets the benefit of what we propose to do.
My Lords, I will speak to Amendment 160, in the name of my noble friends Lord Whitty and Lord Grantchester. I intend to speak on a number of amendments so I must declare an interest. I have a leasehold interest, with my wife, in a band G home on the Thames built on the flood plain. My flat is not threatened by flooding. My home has therefore never been evacuated and I have never made an insurance claim on a property I own. Nevertheless, I feel that I have an interest to declare while speaking on an issue that affects tens of thousands of home owners who similarly live in the vicinity of the Thames, many of whom are now being evacuated.
I start by congratulating the Government on introducing this scheme, which I understand was the subject of some very difficult negotiations with the insurance industry. I want to refer to a particular group of home owners, of which I am not one, who come under council tax band H. Council tax band H is pretty expensive property, as we know, and the flooding over the past few days has probably affected thousands of these properties up and down the River Thames between Chertsey and just south of Maidenhead, near Windsor. These home owners will be very worried about what is going to happen. They are excluded from this scheme. Not only do they have the problem of how to resolve their immediate difficulty of dealing with the flooding and the consequences for their homes, but they will also be worried about the longer term financial implications, in the event that their premiums are substantially increased—which they will be. I know that from my own experience in the Lake District, which I mentioned during my previous intervention. For most of my life, I lived there in the town of Keswick, which was subject to flooding. Many people there found it impossible to get insurance from insurance companies following the floods that took place some years ago.
There is going to be a real problem for these people. Many in the Thames Valley are not included in this scheme because their properties fall into band H. It is not that the Government need to interfere with this scheme. I understand its merits and it has been very sensitively negotiated. We very much support it. However, heads have got to be banged together to find a way of resolving the problem of many of these people who live in band H property.
People may ask what I am doing defending people living in band H properties from the Labour Benches. The reason is simple: many people who live in band H properties did not buy them as band H properties. They bought them when they were much cheaper, and when their incomes may well have been quite modest. Property price inflation in London and in the south of England has placed many people in this position. Even the way that the mansion tax is being construed may affect people who have quite small incomes. I am in favour of the mansion tax, but maybe the way that it is to be calibrated raises the same questions. People on low incomes who find themselves living in expensive properties—I am not one of them, as I said—have to be considered in these matters. I hope that the Government, even as late as this in the Bill, might on Third Reading at least make some statement as to what provision might be made for them, notwithstanding what the Bill provides on Flood Re.
My Lords, it is probably appropriate that I follow the noble Lord, Lord Campbell-Savours. I have to admit that I live in a band H property, but it is not in London and I am glad to say that it is built on a hill. My Amendments 160ZA and 161D are in this group. I shall be brief, because there is another larger issue that I want to address.
I tabled Amendment 160ZA to see whether I could flush out the rationale behind the exclusion of certain categories of property from FR, but also because there seemed to be a reluctance to consider both sides of the coin in terms of what is in and what is out of the safety net. What is in identifies and underlines what is out. It cannot be otherwise. The fact of exclusion does not mean that other insurers will not provide some cover, but it does, as the noble Lord, Lord Campbell-Savours, said, have consequences. I have certainly received correspondence suggesting some very significant rises in free market premiums based not so much on the immediate severe risk but on that broader category of material risk that will be flagged up and will lie between those that have no risk whatsoever and those that are protected by the FR safety net. It is in the public interest that any scheme report under Amendment 160 should look beyond the narrow scope of FR inclusions and also look at wider exclusions.
On Amendment 161D, I wanted to raise an allied issue. Part of the problem is that many of the terms in Clause 69 are undefined, “household premises” being one of them. My amendment would simply insert a definition of “household premises”. Paragraph 14 of the 20th report of the Delegated Powers and Regulatory Reform Committee points to the huge amount of detail that is going to be—to put it bluntly—kicked down the road to be dealt with in regulation, probably towards the end of this year. This creates great uncertainty both for this House, in terms of working out what we are legislating for, and for those homes and businesses which may in due course be affected. Uncertainty, as I know as a professional valuer, is corrosive, and particularly so in the present state of flooding and dislocation of households, businesses, services and infrastructure, of which we have heard a great deal. As a factor in risk assessment, it is essential to contain it as far as possible. I think that the Government could probably do better on that count because FR is hypothecated on a very narrow basis.
I have already flagged up the issue that I am about to raise with the Minister, and I thank him for his letter to me following Second Reading and for seeing industry representatives last week. The second bullet point in the revised statement of principles states that ABI members will,
“Continue to offer flood cover to existing domestic property and small business customers at significant flood risk providing the Environment Agency has announced plans and notified the ABI of its intention to reduce the risk for those customers below significant within five years”.
The noble Lord, Lord Moynihan, also introduced this point. However, long leaseholds, buy to lets, band H properties and those built post 2009, and small and medium-size enterprise premises fall to be excluded. I assume that they are excluded because there are no government plans to reduce the risk and therefore flood reinsurance cannot underwrite them—that is an assumption that I make. So the many people who thought that FR would ensure future cover for their properties will be disappointed.
I understand that the sustainability of insurance cross-subsidy is an issue, and I do not suggest that this should be perpetuated for any longer than is absolutely necessary—nobody should expect government or society at large to prop up an outdated risk model or practices involving cross-subsidy in the knowledge of much more detailed individual risk. However, this is about a managed transition and it is to the credit of the Government and the ABI that a precipitous withdrawal of flood cover did not occur last summer. However, with the present weather, the exclusions from FR and a lack of clarity over many of the implications of Clause 69 definitions, along with better knowledge— which is always a dangerous thing—we have significant transitional uncertainties. Valuer members of my profession, like me, deal with this sort of thing constantly.
Contrary to what the Defra impact assessment might lead one to suppose, there is no simple gradation of supply and demand via the price system when dealing with risk in property valuation. In the lending world, it is more a case of a simple on/off switch. There are many reasons, but the voluntary banking regulation under Basel III may have something to do with it along with recent memories of toxic loans. I have conferred within my own profession and with the British Property Federation and the Council of Mortgage Lenders. It appears to me that the interdependence of insurance and mortgages is highly significant. Absence of cover for a standard peril, including flood, most probably means no mortgage either.
There is also, of course, the lenders’ ability to look at risk on their own terms, regardless of whether there is an insurance underpinning. It is my belief that, in future, lenders will not be any more indulgent than insurers when it comes to risk, and probably a good deal less so, given the typical mortgage life compared to an annually renewable insurance policy. This becomes akin to what I understand is known as a “red-lining principle”, a term coined in the USA, which the noble Baroness, Lady O’Neill of Bengarve, who is not, I think, in the Chamber, pointed out to me a few days ago. Put simply, everything within a red line drawn on a map becomes uninsurable and then unmortgageable; disinvestment, deprivation and decline then follow.
The noble Baroness, Lady Gardner of Parkes, who is also, I fear, not here today, reminded me last week of the effects of lender reticence on high-rise and ex-council flats. Value write-offs in these cases might easily be in the order of 10% to 15% without any other environmental risk. Once property of any kind is in a limited market of cash buyers only and with a material flood risk attached, as we are talking about in this instance, write-downs might easily exceed 30%.
The Council of Mortgage Lenders calculates that 5 million residential properties will fall outside the FR scheme, to which might be added—I am guessing—a million small business premises. If a third of those suffer an average write-down of £100,000 due to being in a mortgage ghetto, the outcomes are substantial. Mr Philip Wilbourn, FRICS, an expert in valuation and environmental risk, considers that direct and indirect write-offs could be trillions of pounds. That is a very serious implication. Even if he is only half right, the Government need to take note. It is enough to affect loan books, investment, pensions, tax yields and overall market and investor confidence. This is also about financial security of households and solvency of businesses.
I do not blame FR, but I do suggest that a more holistic approach is needed if market turbulence is to be minimised. Leaving significant sectors high and dry—excuse the pun—has accentuated what is ultimately a latent problem. Nor do I suggest that FR could ever be expanded to cater for this, so we need to look elsewhere. I have written to the Minister suggesting ways in which potential harm might be mitigated. I suggest that he engages in urgent discussions with professionals and lenders as to how some of the very useful measures in the Bill can be fast-tracked to empower and resource local communities, such as those on the Somerset Levels, and foster more initiatives such as Sheffield’s Lower Don Valley business improvement district scheme. I also think that it is time for a change in the lending and insurance markets. The Government have a role in constructively addressing risk and preventing precipitate and unconstrained damage affecting everyone.
I raise this issue because it seems to me that, although it sits outside FR, it is a matter of very great public interest and very great financial import. I thought long and hard about whether I should raise it in the context of the Bill, but ultimately felt compelled to do so. I do not think it is anywhere near a lost cause, but for the same reasons I gave earlier this afternoon that we need investment to go into resilience and flood protection measures, we do not need the plug pulled on the capital value element of properties at the same time. I hope that the Minister, who I am certain will not be able to give me any very detailed response, if any at all, will take this away and that perhaps some aspects of the Bill can be fast-forwarded, if for no other reason than to bring back confidence, which I fear may soon be in limited supply if nothing is done.
The Government need to be on the front foot on this—as, indeed, there is every reason to be—in order to make sure that damage, in terms of the perception of what is being done and how all this is being contained and managed, is brought back into a sensible format.
My Lords, I put my name to my noble friend Lord Moynihan’s amendment and I shall speak briefly in support of it.
The Government’s impact assessment on managing the future financial risk of flooding states that there is insufficient evidence of a problem for businesses to get insurance and that there are other market mechanisms for them to get cover. However, the impact assessment focuses on the national impact, whereas flooding affects localities, so it is perhaps no surprise that it did not find that much evidence.
Further, the Government’s position is driven by their recent consultation on the issue, which asked for evidence of a need for a mechanism for small businesses and received a few responses from small businesses, which may well have had other priorities. The ABI has given the Government assurances that the broker community is doing,
“a good job working directly with business customers in getting a good deal for them”.
I contend that it is the Government’s job to insist that there be firm evidence of that, which is what the amendment is intended to deliver.
There are few studies of the impact of flooding incidents in general on business, apart from some by AXA, and they focus on the impact on individual businesses rather than the broader economic resilience of communities in the face of flooding. I could not find any research which looks at the significant impact of flooding on small businesses, which often make up the backbone of the rural economy. It is here that flooding has a huge impact not just on individual families and their businesses but on the complex web of supply and demand chains in the local economy. Ensuring adequate flood cover for small businesses, including farm businesses, is as important as supporting households if we are to protect the overall community resilience of rural areas.
As my noble friend Lord Moynihan said, small businesses were covered by the statement of principles and they were able to get flood risk insurance in the same way as households. Given that Flood Re does not guarantee them that insurance, we certainly need reassurance from the Government that they are mindful of the need for cover for businesses, particularly small businesses, and of their important role in rural communities.
My Lords, I should declare an interest that I declared on Second Reading, which is that, until June, I was the chief executive of two insurance companies, and I still labour under some residual contract limitations.
There is an overriding need to put in place a workable solution that will, first, solve the most pressing need, which is to address the availability and cost of flood insurance and, secondly, do so in a way that is timely, affordable to the insurance industry, secured in co-operation with it and that does not allow government subsidy to create a huge deficit in the scheme over time.
Addressing the issue of small businesses raised by the amendment of the noble Lord, Lord Moynihan, we ought to remind ourselves that the statement of principles only covers the availability, not the affordability, of insurance for those small businesses. It covers only renewal policies, so the policyholder at risk of flooding cannot change insurer, and it does not cover the cost of the policy.
There is also the question of practicality. The introduction of businesses into Flood Re would dramatically complicate the pricing of the scheme, the availability of Flood Re as crucial reinsurance—on which the scheme depends—and, by no means least, the complexity of the internal model, which will have to be approved by the PRA. All the different coverage afforded by business policies, such as business interruption, contingent business interruption and loss of profits, will make the internal model much more complicated compared to what are fairly homogenous homeowners’ policies.
To address the most pressing need as soon as possible in a way that is acceptable to as many people as possible, we should concentrate on the most important issues and leave the Flood Re design as it is.
My Lords, I speak to Amendments 161B and 161C in this group. Although welcoming the introduction of Flood Re and accepting that it is essentially a scheme for domestic premises, I remain concerned about the exclusion of small businesses, especially in very rural areas. I refer specifically to those which are mixed hereditaments. The key question appears to be: what happens to mixed hereditaments in terms of qualifying for inclusion in Flood Re?
There are two scenarios for mixed hereditaments. The first is where the business element is deemed by the valuation to be de minimis. This means it forms such a small part of the overall hereditament that it appears only in a domestic list for council tax. The second is where the business element is more significant, and is therefore liable to both council tax and business rates. If the property does not appear in the waiting list for business rates as well as for council tax, the liable party may qualify for business rate relief. This could be small business rate relief, where it is their only business premises.
I understand that, currently, if the rateable value is less than £6,000 the relief received would be 100%. Rateable values between £6,000 and £12,000 receive relief on a sliding scale. This enhanced small business rate relief scheme has been extended until 31 March 2015, and not beyond that at the moment. The standard scheme allows a relief of 50%. In a rural settlement it might be the case that a village shop or post office is part of a mixed hereditament. In this case it would qualify for rural rate relief. Also, in a rural settlement, a pub with living accommodation above could qualify for rural rate relief on the pub element.
I am extremely concerned about excluding mixed hereditaments from access to Flood Re. This could have a dramatic impact, not just on the business owner but on those residents who use the business. If that business cannot get flood insurance it may remain unviable and may be forced to close prematurely if flooded. Where, for example, this is the last shop or post office in the village this could have a significant impact on the villagers.
My Lords, I congratulate my noble friends Lord Moynihan and Lady Parminter on tabling Amendment 155, as it has given us a good chance to debate flood insurance for businesses, whether in Flood Re or in another mutual set up specifically. We are all under pressure to include small businesses under the Flood Re scheme. That is quite understandable. If I had a business in a flood risk area, I would want to insure it under the Flood Re scheme. I know that the Association of British Insurers and the Government looked at whether businesses could be included within the Flood Re scheme, but found that it threw up more problems than it solved. This is best illustrated with an example.
I am a free range egg producer on my farm in Norfolk, and when it came to buying insurance for the business, I was presented with a long shopping list of types of cover relevant to my business: property; business interruption; loss of profits; contractors “all risks”; terrorism and malicious attack; livestock, including theft, worrying, death after straying, accidental or malicious death; deterioration of stock, in my case probably due to bad feed or electrical failure; perils and fatal injury; livestock in transit; disease, in my case probably something like bird flu or salmonella; goods in transit; motor, for lorries, trucks, vans or cars; employers’ liability; public liability; product liability or environmental liability; legal and professional expenses.
The list goes on, but I hope that gives your Lordships a flavour of the range of commercial insurance on offer. I, of course, had to cherry pick the cover that was most relevant to me. For instance, I did not buy livestock or goods in transit cover, because this is the responsibility of third parties with whom I have a contract. Also, I have no vehicles in that business, so motor insurance was not an issue. However, salmonella is an issue for my business, but because the insurance is so costly I chose not buy it. I hope that I got that one right. I have to choose not only the type of cover that I think is appropriate to my business but how much cover to buy for each category, the cost and the level of excess necessary to reduce that cost. The excess across my shopping list varies from £100 to £20,000.
Although there are hundreds of egg producers up and down the country with identical businesses to mine, I very much doubt that there is another that has commercial insurance exactly the same as mine. They will all be different, and that is the problem: all businesses, whether a corner shop, a pub, a guest house, a property investment company, a hotel or guest house, a manufacturing company or an engineering firm, will buy commercial insurance to suit their particular circumstances. The whole point of a mutual, whether Flood Re or one geared specifically to small businesses, is that the conditions are common to all. The price, the excess, the cover and the conditions must be standardised. This can be done for homeowner insurance—it is pretty bog-standard—but sadly, as I have tried to illustrate, not for commercial insurance. You just cannot standardise it. If it were standardised, virtually all commercial members of that mutual would end up with a policy that did not give them the cover that they wanted.
It would be good if everything could be included in Flood Re, whether owner-occupied houses, rented homes or small businesses, but the line must be drawn somewhere. It has been agreed that those with homeowner insurance, buildings and contents, will be included and that commercial insurance will not be. If I had a property in a flood-risk zone that was deemed to have commercial insurance with it and was therefore excluded from the mutual, I would ask my broker to split my insurance cover into two separate policies: one for the bog-standard homeowner cover, buildings and contents, to ensure inclusion within the Flood Re scheme, and the other to include all elements that made my cover commercial, such as owner’s liability or public liability cover. That might be a way forward for many of those finding themselves excluded from the Flood Re scheme because of the commercial element of their policy.
Flood Re will help up to 500,000 homeowners who cannot currently buy flood cover, but I am sure that with a little bit of inventiveness, many, although I am afraid not all, small businesses, including buy-to-let and leasehold properties, can buy their insurance in such a way as to be included in the scheme.
My Lords, my noble friend and I have two amendments in this rather complicated group. The group as a whole is beginning to get us into the area of who should be in and who is out of Flood Re, and we have some groups of amendments later that touch on the same issue. Before the Bill leaves this House, we must be clear who is in, who is out, and why.
My Amendment 160 would require the Secretary of State to report on the numbers of properties in flood-risk areas that were eligible, and those that were not, for inclusion in Flood Re. It would include looking at the specific exclusion as it stands of council tax band H and post-2009 new build. The report would look at how much it would cost to bring them in and who would bear the cost if they were brought into Flood Re, in terms of both premiums and the effect on the non-risky properties’ cross-subsidy.
We all have some sympathy with those groups that are excluded. However, we must be careful, as this is a delicate arithmetic deal between the Government and the ABI. I understand that negotiations were hard and long. As far as businesses are concerned, it is obvious that this must be addressed somehow. We have all seen the effects of flooding in recent weeks and the past few years, on small businesses and farms, on the Cockermouth high street a year ago and on the seafronts at Dawlish and Aberystwyth in recent weeks. We also know that the businesses that are hit—the shops, boarding houses and small businesses—are key to the prosperity of those local economies. It must be frustrating for small businesses, and those advocating their case, like the federation, because they were covered in some way under the statement of principles under the old scheme. However, the old scheme was a different sort of scheme. It was a deal struck by the ABI, agreeing that it would continue to cover—even then, it was not offering new cover—small businesses as well as households if the Government committed themselves to a certain level of expenditure on flood defence.
This is a different sort of deal; it is actuarially based. While we have all received representations on behalf of businesses, the approach now has a different basis. Even so, it is complicated. Some micro-businesses operated out of the owner’s house could be covered because they pay council tax rather than business tax. However, others will not. There are good reasons for this. The noble Earl, Lord Cathcart, described the bespoke way in which businesses negotiate their insurance as distinct from the more generalised way in which households are covered. It is difficult to see how businesses could be included in Flood Re as it stands without serious reconfiguration of the whole arithmetic. Therefore, while I have sympathy, I would not go so far as to press the Government on this front. However, I am in favour of knowing more about this. Therefore I support the proposition of the noble Lord, Lord Moynihan, that we look at this and report on it and see whether that might lead us to some other form of provision in parallel with Flood Re.
Some of the other boundary issues are even more complicated, particularly in relation to leasehold properties and the issue of whether landlords and tenants are included. The noble Earl, Lord Lytton, has dealt with one element of this and others are dealt with later on. Some of the government literature refers to leasehold properties. However, in general, the ABI and the Government do not think that leasehold properties are included. The situation with single landlords and tenants is not clear, although commercial providers of leasehold property are not included. The differentiation here is more the nature of the insurance than the nature of the property. While the property may be defined as being in risk or not, in a landlord/tenant situation, the tenant probably takes out the contents insurance, which is covered, whereas building insurance, which is the landlord’s responsibility, is not covered. That is quite a complex position, and it would also be true for multiple leasehold property. A future mortgage on such property is dependent to some extent, as the noble Earl, Lord Lytton, said, on there being ongoing insurance on the property. Leaseholders and the owners of the property may be faced with a double whammy if they are not careful.
As I said, I am not in favour of widening the group at this time because of the delicate arithmetic involved. We must address some of these issues in the Bill but for the moment I cannot support the amendments proposed by the noble Earl, Lord Lytton, nor the proposals of the noble Baroness, Lady Bakewell of Hardington Mandeville, on mixed hereditaments. I am not sure whether Amendment 160A in the name of the noble Lord, Lord Shipley, which would effectively delete the exclusion of post-2009 properties, is in this group. That is in a rather different category because people have been building in high-risk areas when they have known that they were going to be excluded under the old agreement, let alone the new one. I therefore have less sympathy for that group than I might have for the others.
We need to be clear about who is in and who is out. If we include any others, we have to understand the cost and who will bear it. The cross-subsidy for those who are not involved at all is an issue. I know that the insurance industry and the Government say that there has actually been cross-subsidy for ever, but nobody knew that before. Now that it is explicit, the Government have to be careful if they are going to accept some further risk which increases the costs, which people who are not directly involved might not be prepared to pay, whatever sympathy they might otherwise have.
The amendment of the noble Lord, Lord Moynihan, on businesses and my amendment on looking at the cost as well as the numbers of properties excluded would be helpful in informing future debate in this area. Meanwhile, my Amendment 161 provides for an appeals system. It is not for an appeal about whether you should be included at the beginning; it is not about whether band H should be included or not. It is about subsequent developments which might exclude people who initially appeared to be included in Flood Re, but were for one reason or another excluded. That can happen for a number of reasons, because either the flood risk or the actual incidence of flood has increased and therefore premium arithmetic changes; or it could be the situation I described in the previous amendment: the insurance company insists on mitigation provision as a condition of renewal of the policy but the policyholder feels that they are unable to meet that cost and are thereby excluded. That may or may not be justifiable in any particular case, but a system which is being legislated upon by Parliament has to have some element of natural justice built into it. Therefore, some form of appeal is needed in this whole range of provision. I hope that the Government can accept my Amendment 161, or at least provide something similar to it.
My Lords, I recognise the high degree of interest in the policies that will be covered by our proposals, and those which will be out of scope. I hope that I can provide some clarity today on what is intended and the reasons for this.
The Flood Re proposition we are debating today was carefully designed to address specific, medium-term issues in the domestic insurance market. It was not, of course, designed in light of the immediate crisis that we are facing. I heard the passion and concern from your Lordships last week, yesterday and, indeed, today, about the specific, frustrating issues affecting the broader community, including small businesses and the farming industry. It is clearly a distressing time for many, and I know that they are in all our thoughts. Again, I pass on my thanks to the Environment Agency, the emergency services and the many volunteers, including the churches, who are working tirelessly to help.
However, it is not immediately apparent that there is an insurance angle to the current situation. Those who have insurance will be covered by their insurer. I am grateful, too, for the efforts of the insurance industry, which has been working hard in communities to ensure that damage is assessed and that claims are paid quickly. Until Flood Re is in place, insurers will continue to provide insurance cover. We have no understanding with the industry about expanding the scope of the scheme. I therefore ask that your Lordships forgive me if I combine my response to this debate to the specific proposition before your Lordships today.
I turn first to Amendment 155 of my noble friend Lord Moynihan, which would require the Secretary of State to publish a report on the ability of businesses in high flood-risk areas to secure flood insurance. I emphasise that decisions about the scope of Flood Re have been evidence-based. Compared to the household sector, there is not the same evidence of market failure in the commercial sector, where the insurance market is different. Bespoke policies are more routine—as my noble friend Lord Cathcart so eloquently explained—and they are already priced to risk. I listened with interest to what he, my noble friend Lord Ashton, and the noble Lord, Lord Whitty, had to say.
Businesses, unlike households, have a de facto income stream to cover their costs and can offset the cost of their insurance for tax purposes, so they are different. Flood Re, I emphasise, is concerned with helping to protect those relatively few low-income households from high insurance premia. My noble friend Lady Parminter was, perhaps, sceptical of the suggestion of a lack of evidence. A government survey of more than 9,000 businesses in England estimated that fewer than 1% of businesses had experienced difficulty obtaining property insurance in the last year due to the risk of flooding, and that no businesses had been refused insurance cover due to the risk of flooding.
For these reasons, we do not think that Flood Re would be the right solution for this diverse sector. While there does not appear to be a systemic problem with small businesses being able to obtain flood insurance—and our public consultation endorsed our approach—I recognise that some in areas of high flood risk may face specific issues. As my honourable friend, the Parliamentary Under-Secretary of State for Water, Dan Rogerson, said in Committee in the other place, the Government and the Association of British Insurers have both committed to monitoring the market for flood insurance, including that for small businesses. If sufficient evidence emerges of a problem for businesses, then we have both agreed to look at possible solutions. This research will be published and I will be happy to place a copy of that report in the Library when it is published.
Amendments 160 in the name of the noble Lord, Lord Whitty, and Amendment 160ZA in the name of the noble Earl, Lord Lytton, seek to require the Secretary of State to prepare and publish reports on the numbers of properties which would be out of the scope of Flood Re, including properties built after 1 January 2009, band H properties, leasehold properties and private rented properties. It is very clear from his amendment that the noble Lord, Lord Whitty, has clearly understood that any increase in the amount of policies ceded to Flood Re would need to be funded by others. Indeed, he explained that in his speech on the amendments. It is important that helping households at high risk does not lead to price rises for others.
My honourable friend the Parliamentary Under-Secretary of State for Water set out indicative numbers and costs for including in Flood Re band H and equivalent properties and properties built after 1 January 2009 in a letter to the Committee examining this Bill in the other place. I would be happy to ensure that this letter is made available to noble Lords who have participated in this debate today. However, I would not want noble Lords to think that the impact on the levy is the only reason for post-January 2009 and band H or equivalent properties being ineligible. As I noted, we were very clear in designing Flood Re that we wanted to target the benefits where they were most needed, while not increasing the cost of living for those not at flood risk. That is the basis on which we made the decision that it would not be justified for band H and equivalent properties to be included.
According to the 2011 living costs and food survey published by the Office for National Statistics, 85% of those who live in band H properties and hold a combined insurance policy are in the top 30% of earners, with 48% in the top 10%. More significantly perhaps—and this is in response to the noble Lord, Lord Campbell-Savours—only 0.5% of such households are in the five lowest income deciles, which translates to roughly 45 properties in flood risk areas.
The 2009 cut-off date recognises that new housing developments should be located to avoid flood risk; or where development in a flood-risk area is necessary, they should be designed to be safe and appropriately resilient to flooding and not to increase flood risk elsewhere, in line with the national planning policies in place. This date therefore reflects the fact that homes built since then should already be insurable at affordable prices.
As noble Lords may know, when the agreement between government and the insurance industry, known as the statement of principles, was signed in 2008, it was agreed that there should be a cut-off date, which was set at 1 January 2009. That marker has been in operation for several years and has been maintained under Flood Re proposals. To be clear, there has been no change in policy. Therefore for the reasons that I have set out, we believe that the proposed exclusion of properties built after January 2009 and band H properties is fair and in line with the Government’s objective.
I just want to press the noble Lord on band H. As I said, I myself have no interest in it. However, in light of what has happened in the Thames Valley, is there not an argument for reviewing those figures that the Minister has just given to the House, particularly as regards the percentage of people on lower incomes who by chance happen to live in those rather expensive properties?
I am of course quite happy to review the figures and to write to the noble Lord on that.
On Amendment 160ZA on reporting on leasehold and private rented sector policies, I see that we will also discuss the proposals in this regard on Flood Re later on today. However, before I come on to the specific subject of reporting, I remind noble Lords that the key issue in determining the scope of Flood Re is whether the policy for a particular property is treated as commercial or residential by the industry. Commercial policies are out of scope of Flood Re, which is designed to support households. We believe this approach is fair and practical, and it was supported in the public consultation. However, we recognise that the leasehold sector presents a more complex situation, where the contents policy is classified as domestic but the buildings policy could be classified as either commercial or domestic and could cover multiple dwellings.
I have listened to representatives of the property sector who have come forward with concerns about the impact of the proposed approach on the leasehold sector. They highlighted in particular that those in a smaller building might find it difficult to afford cover in the open market. The ABI has assured me that there is no evidence of a systemic problem with freeholders being able to obtain insurance for their leasehold properties, which I am sure noble Lords will agree is very welcome. However, given the strength of feeling on the matter, particularly in light of the ongoing extreme weather conditions, we need to take time to consider it in more detail, although without evidence of market failure it will be difficult to justify action. We will examine the evidence further with the ABI and hope to provide an update on Report. We will also continue to monitor this sector over time, as a part of the commercial insurance market.
I will focus briefly on the subject of the private rented sector. I take this opportunity to explain that it is proposed that buildings insurance cover for landlords would be out of scope for Flood Re, although contents cover for tenants would be eligible. At this stage I reiterate my declaration of an interest as owner of a property that flooded in 2007. The reason that landlords’ policies are out of scope is primarily because insurers classify all types of landlord insurance as commercial business, while Flood Re is designed for the domestic market. However, it is also important to recognise that the inclusion of landlords would effectively mean that people who do not own their own home could, through their contents premium, subsidise people who own several.
Flood Re targets support towards those least able to pay, through council tax bands. A landlord’s ability to pay cannot be judged against the council tax band of the property he lets. For example, the landlord of a council tax band A property could receive the maximum support if landlords were to be included, even if they were perfectly able to pay. Landlords already benefit from tax relief on the cost of their buildings insurance policy. They can offset many of their costs through taxable allowances which can significantly reduce their tax bill.
Returning to the subject of reporting on the availability of affordable insurance for this sector, I should like to point out that the insurance industry is clear that the majority of landlords would be able to find a more competitive rate outside Flood Re. However, as is the case for the rest of the small business sector, the Government and the industry will continue to monitor the situation. I hope that this provides reassurance as to our intentions in this regard.
Lastly, I turn to Amendments 161B and 161C in the name of my noble friend Lady Bakewell and Amendment 161D in the name of the noble Earl, Lord Lytton, to Clause 69, the purpose of which would be to define all mixed-use properties as household premises for the purposes of the register under the flood insurance obligation, the Government’s fallback policy. This could include a very large range of premises, including many that are beyond the scope of the policy intention. The broad intention is that eligibility for inclusion on the register for the purposes of the flood insurance obligation would be based on publicly available data about the level of flood risk.
I remind noble Lords that the criteria for inclusion on the register for the purposes of the obligation are different from the eligibility criteria for Flood Re, and therefore some of the exclusions and inclusions may be different. Where Flood Re considers eligible policies, the obligation would be based on eligible properties. The intention is to use the same definitions where possible, but these also need to be consistent with the criteria used for defining domestic properties by the administrators of the register, the Environment Agency and its counterparts in the devolved Administrations. Before regulating under the Bill, we would need to consult fully on the definitions and any possible exclusions, not least to ensure that they are clear and can be consistently applied across the UK.
The Delegated Powers Committee has recommended that these definitions be subject to the affirmative procedure and we are carefully considering this recommendation. I hope this reassures noble Lords that, should the flood insurance obligation ever need to be used, the definitions would be subject to appropriate scrutiny, and that their amendments are not necessary.
Understandably, there has been much interest in those who may not benefit from Flood Re or the obligation. However, we must not lose sight of the hundreds of thousands of householders who will benefit. The Government are satisfied that, overall, the proposed approach is fair and targeted towards those most in need of support. However, it is always important that the effect of any policy is reviewed as time goes on. That is why we have committed to monitoring the market over time, and to publishing these findings. Should the evidence point to a specific issue for domestic household insurance, we will discuss with the industry what might be possible.
Turning to Amendment 161, I recognise noble Lords’ concern that Flood Re should help households at high flood risk. To ensure value for money, should households with policies in Flood Re flood repeatedly and not take action, their continuing eligibility to benefit from the public subsidy provided by Flood Re may need to be considered. Constructive discussions continue with the industry on how those who may over time make themselves ineligible for further public subsidy should be treated.
It is important that there should be a challenge mechanism if an individual exclusion from Flood Re were unjustified. I can confirm that the Government will not designate the scheme until we are satisfied with the industry’s proposals. These could include the need to have in place a proportionate challenge mechanism for any households that are deemed to have become ineligible. The regulations setting up and designating Flood Re will be subject to public consultation and we are currently considering the Delegated Powers Committee’s recommendation that regulations made under this clause should be subject to the affirmative procedure. However, Flood Re is not a compulsory scheme and insurers may choose whether or not to cede the flood risk element of policies to it. Householders should, therefore, continue to shop around to get the best deal.
Moreover, it is important to recognise that the relationship between the insurer and the householder will not be affected by the introduction of Flood Re. Under the current regulatory regime for financial services there exists a conduct of business regulator, the Financial Conduct Authority, and a separate complaints-handling service, the Financial Ombudsman Service. The Financial Conduct Authority sets the rules regarding the treatment of customers, the behaviour of firms and the functioning of the market. The Financial Ombudsman Service is an independent entity that makes a judgment against these rules should an individual consumer have a dispute which they cannot resolve through contacting their insurer. I will be meeting noble Lords before Report and will be happy to provide an update to them, and I will come back on Report with more details of how those who flood repeatedly might be treated.
I shall address some of the questions that noble Lords asked. My noble friend Lady Bakewell asked about mixed-use properties—mixed hereditaments. Under the ABI’s proposed approach, mixed-use properties would be out of scope for buildings insurance although contents cover for domestic homes in the property would be included. However, as with other commercial policies, these tend to be priced to risk and do not have the same systemic issues that residential policies may face.
The noble Earl, Lord Lytton, raised a number of issues. I have mentioned several times the report of the Delegated Powers Committee. I am grateful to that committee for its work and welcome its scrutiny of the Bill. It reported at the end of last week and we will respond to its report before Report. We will consider very carefully each of its amendments and, of course, respond accordingly.
The noble Earl, Lord Lytton, asked about definitions. We recognise the desire to give greater certainty about what is meant by the terms in the Bill, but believe that this needs to be balanced with the further public consultation which is intended. Specifically for those terms relevant to the Flood Re scheme, a number of areas of detail relate to the arrangements under which insurance contracts are written by the industry.
The noble Earl also asked a question related to mortgage availability, and I am grateful to him for raising it. We have always been clear that Flood Re is a transitional measure aimed at smoothing the move to an open market over the lifetime of the scheme. If property owners do not take action to lessen the impacts over this period, it is likely that they could face higher premiums when the scheme comes to an end. Adjustments in asset prices and mortgage decisions that are based on them will be a necessary part of this transition. I appreciate that the noble Earl thinks that Flood Re may not be the place to deal with this and I am very happy to continue discussions with him on that matter.
For the reasons I have set out, I hope that my noble friend will withdraw the amendment.
Before the Minister sits down, I hope he can help me with a small matter, which nevertheless would be significant for a minority. Given the duration of the scheme, there is likely to be a rebanding of council tax during that time. Somewhere it needs to be made explicit what will happen to people who move up into, for example, band H during that time.
My Lords, I am very grateful to noble Lords on all sides of the Committee for the interest they have shown in this issue. Their contributions have demonstrated how critical it is and what should be in and what is out. I place on record my thanks to my noble friend the Minister for a very comprehensive reply on a lot of issues that have been raised on all sides of the Committee. The noble Lord, Lord Campbell-Savours, is a noble friend on this issue since I am in complete agreement with him. I do not agree with him on every occasion but I certainly do on this one. I say to him that it is not just that some householders did not buy their properties as band H properties; it is that there is no absolute correlation between personal wealth and band H occupancy, a point that I sought to demonstrate at Second Reading. If you accept that principle, surely it is wrong that band H should be automatically excluded. Indeed, the Minister, in his reply, mentioned the 45 properties that were in need of support; that is, owned by people who were not wealthy but would be automatically excluded as the Bill is drafted.
My noble friends Lord Ashton of Hyde and Lord Cathcart mentioned how complicated it would be to change the Bill to take appropriate care of small businesses. I agree that the Bill is complicated; it is complicated throughout. However, surely the thoughts of this House are with the SMEs, the pubs, the guest houses and the farms that have been devastated by the recent floods and cannot now secure affordable insurance provision. They have been hit incredibly hard. If it is not through Flood Re, surely we should be looking to deliver support for SMEs through an appropriate provision. I argue that the Bill is the right vehicle to do that.
I appreciate that my noble friend Lord Cathcart was eloquent in the detail he went into to secure his insurance for his egg business—or “an” egg business, to be fair to him. Such expertise cannot be expected to reside with every publican or small business at the centre of communities serving important commercial and social roles. We should look very carefully at this matter at a later stage.
My amendment simply allows us to study that in detail. I am very grateful to the noble Lord, Lord Whitty, for his support. I am also grateful to my noble friend Lord Campbell-Savours for highlighting the fact that this market will have markedly changed in the past three months. Of that, there is no doubt whatever. It is incumbent on your Lordships’ House and the Government to look at the extent to which that market has changed and to which we need to respond to those market changes.
While I hope that further consideration will be given to these issues—I, for one, will seek to bring them back for further consideration—for the time being, I place on record again my thanks to the Minister for his answer and beg leave to withdraw the amendment.
Amendment 155 withdrawn.
155A: Clause 51, page 107, line 20, at end insert—
“( ) Within 24 months of this Act coming into force, the Secretary of State must review the effectiveness of the delivery of planning policy in achieving low levels of flood risk for new developments by examining—
(a) the system of planning policy delivery,(b) the role and effectiveness in reducing flood risk of those organisations with a duty to cooperate under the Flood and Water Management Act 2010, or their equivalents in the devolved administrations, and(c) the effectiveness of the delivery of the National Flood Management Strategy.”
My Lords, in 2008 when serious flooding hit Northumberland, parts of Newcastle and several parts of the north, and 1,000 people had to be moved out of their homes in Morpeth, it was a major learning exercise for the statutory authorities; that is, the Environment Agency, Northumbrian Water, the local councils and the emergency services in particular. It was a major learning exercise because they had to respond properly and to work well together in the public interest.
In the years leading up to the 2010 Act, I wondered how much of a help that would be in defining the duty to co-operate to make sure that all the agencies involved in dealing with flood and flood risk would manage to work effectively together. In the main, that has happened, although in Somerset it has become unclear whether that duty has worked effectively, given the Environment Agency’s statement that it offered to dredge on the Somerset Levels if other partners joined it. I do not have all the details but I raise the point simply to demonstrate that the duty to co-operate between the agencies matters very much.
This amendment asks for a review within 24 months. Given the changes in flooding patterns around us, we need to be clearer about how the planning and risk management systems are working in practice. The amendment would enable a review of the effectiveness of the delivery of planning policy in achieving lower levels of flood risk for new developments by examining,
“(a) the system of planning policy delivery,
(b) the role and effectiveness in reducing flood risk of those organisations with a duty to co-operate … and
(c) the effectiveness of the delivery of the National Flood Management Strategy”.
It means that we have to confirm, and regularly reconfirm, the capacity and performance of all the organisations involved in reducing flood risk. These will include developers, local government officers and their planning committees, building contractors and building inspectors. We should also look at how national organisations, which have a tendency to be centralised, work effectively with local knowledge, and how that local knowledge is incorporated into the decision-making processes of the national agencies.
I understand that there have been instances where properties built since 2009 have flooded or caused other properties to flood. We need to know better than we do how big a problem this is, how often the flooding was due to flood waters exceeding the risk anticipated, and how often it was due to poor design or poor construction.
I was somewhat concerned to discover that the Environment Agency comments only on larger developments. It is understandable why that is the case, but in 2012-13—here I am quoting from DCLG statistics—local planning authorities received 455,500 planning applications and the Environment Agency provided responses to 30,251 of them; that is, 6.6% of the total. Obviously, most planning applications are small ones in which the Environment Agency need not have a role. However, we need to be clear whether the Environment Agency should have a formal, statutory consultation role in more planning applications than is currently the case. The current position is that the bulk of applications, including those for high surface water flood risk areas, are being dealt with entirely by planning committees and their officers, who follow national guidance. One assumes that they follow that guidance, but it also means that the cumulative impact of many small developments is not commented on and may not be taken into account. There is a further issue. At a time of reducing resources in local government, is everyone confident that all councils have the technical expertise to handle the complex drainage issues that arise? The Government need to be certain that they have all of the evidence they need, and therefore a review within 24 months should be undertaken.
I want to make a last point. I am concerned that we may be being too ambitious for sustainable urban drainage systems schemes. I understand from a press report I read a couple of days ago that 10% of the homes now being built are on flood plains. Of those, 1% to 2% are in high-risk areas. If the right preventive measures are put in place, which can include such schemes, it is not necessarily a problem that 10% of new homes are being built on flood plains. However, an important statement of the obvious is this: SUDS do not work on flood plains when there is substantial flooding. I guess we all know this, but I am concerned that there is a cumulative impact on planning permission for small developments; or, rather, I would like to be convinced that that is not the case. I would like to be certain as well that there is not an overdependence on SUDS schemes being seen as a solution to the problem when they may well not be.
This is a probing amendment, and I hope that the Minister will agree that it is important that, within 24 months, there should be a review of planning policy and flood risk management and delivery, and that two years is really the maximum period within which that should be undertaken, particularly in view of current circumstances. I beg to move.
My Lords, I intend to use Amendment 155A as a peg for discussing what is described—in paragraph (c) of the new subsection that the amendment would insert into Clause 51—as,
“the effectiveness of the delivery of the National Flood Management Strategy”.
In particular, I want to highlight limitations on the current arrangement under that strategy and how those could be modified. I shall draw on a particular example by praying in aid a particular case.
In 1990, Thames Water proposed a reservoir in Oxfordshire. Its plan set out how the company could meet demand up to the year 2015 for water supply in the south-east of England. Its proposal was for a reservoir on land south-west of Abingdon in the Vale of White Horse. In 2008, some 18 years later, Thames Water held a consultation on its draft water resource management plan for meeting water demand up to 2032. The draft plan again included a proposal for the Abingdon reservoir. If it appears that I am speaking slightly obliquely to the amendment, I am sure that noble Lords will soon recognise the relationship between what I have to say and the amendment on the Marshalled List. In 2009, following a process of consultation, the management plan from Thames Water was amended and the reservoir reduced in size, and in 2010 there was a public inquiry. In March 2011, the Secretary of State, Caroline Spelman, announced her decision to remove the proposal for a reservoir at Abingdon from the management plan. The reasons were, primarily, that Thames Water could not prove a risk to current water supplies and, secondly, that insufficient consideration had been given to transfer and reuse schemes.
It was argued that water available in other parts of the United Kingdom could be transferred to the south-west of England, although when I was doing a little research on this last week I could not understand how it was impossible to prove that there was not a risk to the water supply in the south-west of England when over a number of years, certainly in the early 2000s, we were being told that reservoirs were empty almost throughout the United Kingdom. There were blocks on the use of water for gardening, and I understand that in some areas there was even talk of introducing standpipes for the water supply. Nevertheless, that was the decision taken at that time by the Secretary of State. I suspect that there was more nimby in the decision than a proper evaluation of water supply and demand. I understand that the next review is due in 2018-19.
Why is all this relevant? To answer that question, we have to move north to Cumbria, to Thirlmere. Thirlmere supplies water to Manchester. Thirlmere is a reservoir above the town of Keswick—where I have lived most of my life—which feeds water from the dam down the Greta river through Keswick, down through Bassenthwaite Lake, down the Derwent and on to Workington, which was the subject of substantial flooding some years ago. After that flood event some years ago, I was asked to set up a group in Keswick to hold discussions with the Environment Agency and United Utilities on what action could be taken to reduce the incidence of flooding in Keswick. Our group’s case was simple: Thirlmere could be used for flood alleviation purposes as well as for water storage. If we retained within Thirlmere sufficient unused water storage capacity, in times of predicted heavy rainfall we could use the reservoir to control the flow of water into the Greta through Keswick and substantially reduce the incidence of flooding in the Keswick area.
In the beginning, United Utilities resisted because it meant the release of its valuable asset—water. However, over time it adopted a more reasonable approach and agreed to reduce the level of the reservoir in the months of high rainfall, primarily in the autumn, winter and early spring. We set target water levels for each month in the meters below the spillover at the head of the reservoir and the dam head. When the reservoir is too full, water is released. Many people in the town believe it has served the town well and avoided substantial flooding over recent years, despite the fact that on occasions they have had trouble releasing sufficient water due to mechanical release valve difficulties.
Let us return to Abingdon and what has happened over the past week in the Thames Valley. I refer again to the interest I declared earlier. Why can we not have a similar arrangement for Abingdon? Why can we not bring back the proposal for a reservoir on the Abingdon site with a dual purpose? The first would be water storage to meet increased demand in the south, and with the proposed development of new towns in the south that is part of the Government’s housing strategy, there will be increased demand—indeed, at the moment demand in drought periods is not being sufficiently met. Secondly, the reservoir could be used for flood alleviation purposes, with target storage levels providing for controlled releases into the River Thames.
Let us go back to the Thames Valley. The communities that have suffered over the past week know that there is no way of resolving their problem in the long term. You cannot build defences along the Thames on the scale necessary to protect the towns and villages—Wraysbury, Datchet, Chertsey, Staines, Sunbury and all those towns; it is impossible. We have to find a solution further up the system. I have raised this in relation to this amendment because I believe that the solution is to create large areas that can be pooled and used for flood alleviation in the future.
It seems to me that to secure that objective, the law needs to be reviewed. We need to strengthen the hand of those who wish to use reservoirs in this way. As I understand the current statute, there is no statutory requirement—a power available to the Environment Agency or to the Government—placed on water companies to use their assets in the way that I suggest. I hope that what I am suggesting today is followed up in the communities that have been affected over the past week by this vast, insuperable problem of flooding, because they need to look long-term as to what the solution is, and the solution is not in flood defences. The solution is upstream. I hope that they follow up my suggestions. In Abingdon there will no doubt be some difficulty over the proposal, but we all have to stand together to find ways to resolve the problem. Unless it is dealt with soon, it will have calamitous implications for the future.
My Lords, briefly, I support my noble friend Lord Shipley on this important amendment. We are rightly spending the majority of our time today discussing a financial vehicle to deliver affordable flood insurance, but the planning system has a vital role in making our country more resilient for the future. On the potential effects of cuts in local authority budgets on their ability to undertake their important planning functions, which my noble friend mentioned, I add that a review in 24 months’ time is sensible, given that in the intervening 24 months there will be further significant cuts to the Environment Agency’s budget, with an expected cut of more than 550 staff.
Given the scenes we have seen in recent days, it would be only too easy for people, rightly, to make the case that we must protect front-line staff in the Environment Agency. However, it is equally important to look appropriately at people in the back room who are working hard on the consultations on significant planning applications for developments of more than 10 houses or one hectare. Equally, it is important that the national flood management strategy, which the EA devised in 2011, is carried forward.
I add my support. The timeline that my noble friend Lord Shipley has suggested of 24 months is apposite given the need to review some of the resource constraints that both local authorities and the Environment Agency will face in the forthcoming months.
My Lords, I too support the amendment of the noble Lord, Lord Shipley. I have already declared an interest as the chairman of the adaptation sub-committee of the Committee on Climate Change. The sub-committee has a useful data set that could be brought to bear were this review to happen. It has developed a set of indicators, which are published, for the resilience of planning decisions in relation to present and future risks from flooding, particularly from future impacts of climate change. For example, it has looked at the implementation of SUDS, at the implementation of household measures that could provide protection at the individual property level and at planning decisions to develop in the flood plain. As has already been said by the noble Lord, development in the flood plain has been going ahead faster than development elsewhere, but this is not necessarily a bad thing. If the properties are appropriately protected, either by community-level measures or by individual household measures, the risks can be managed. The sub-committee has a data set and a set of indicators that could be useful were the Government minded to accept the amendment moved by the noble Lord, Lord Shipley.
My Lords, I welcome the opportunity to debate this important point. I declare a professional interest in aspects of planning. The question of planning policy and its co-runner, which it informs, development control, raises some important issues on the ground. These need to go beyond the question of new-build developments alone. I do not know whether the noble Lord, Lord Shipley, intended to address just new-build developments but if he did, perhaps I could digress into the area of what we do about some of the existing building stock, which I flagged up at Second Reading. I alluded then to the desirability of making conditions concerning the containing of surface water run-off within existing individual properties, as opposed to just allowing each to discharge it on to the next property downstream.
I wondered whether this might be made retroactive to a degree, perhaps by requiring extensions and alterations to existing properties to incorporate, in appropriate circumstances, a surface water attenuation scheme. I do not believe that this is a general requirement but there are precedents. For instance, if you renew the roof covering of your house, you are often obliged to upgrade the insulation of the roof of your property. There is an analogy there. Surface water attenuation on a per property basis could also be combined not only with water conservation, but with habitat-friendly outcomes. The same thing could apply to the principle of reducing vulnerability of the property itself—a point made earlier by the noble Baroness, Lady Parminter—in connection with quite ordinary adaptations that can be put in place to prevent properties being so severely affected by flooding, should it happen. There is also the question of community-based schemes to protect groups of buildings. I referred to the Lower Don Valley scheme, but there are others.
One of the things that has come out—sorry, that is probably a bad term—or rather, has arisen recently is the question of making foul drainage systems safer, so that if flooding does happen, flood water does not turn into a solution of dilute sewage, adding health hazards to all the other problems of clean-up. That requires special measures, not least because shared sewer pipes that are on private property but are ultimately connected to a public sewer are now the responsibility of the statutory sewage undertaker. I have this terrible feeling that they have no idea of the routes, the condition or the materials of half of these pipes for which they have now inherited responsibility. They have my sympathy in that respect.
The noble Lord, Lord Krebs, referred to building on flood plains. My only point there is that protecting properties so that they are themselves secure against flooding is one thing. Transferring risks to properties elsewhere is self-defeating. My difficulty is that I am not sure that a holistic approach is taken to dealing with the totality of flood plains. Often, these may be in more than one local planning authority area, so there may be problems of co-ordination. With regard to that, the noble Lord, Lord Shipley, referred to the competence and capacity of local government and the noble Baroness, Lady Parminter, referred to reductions in Environment Agency budgets that might affect its ability to have this overarching, integrated view. I worry about that. It is vital that the sort of report that the noble Lord, Lord Shipley, has in mind covers all these aspects. If we start leaving bits out, we shall be no further forward in a few years’ time than we are now.
I draw attention to the catchment area management plan referred to by the noble Lord, Lord Campbell-Savours. I have some experience of this, not all of it edifying. In at least one instance, I found that half the catchment area concerned, the upstream half, was missing from the plan. The only fact that I could ascertain was that the owner of the missing part was the National Trust. I am unsure what conclusions I should draw from that, but if you have a catchment management plan, the boundary of it has to be drawn along the watershed. No other boundary is possible. The simple arithmetic that was drummed into me, probably from O-level geography onwards, has not escaped me. Making up rules to suit as one goes along will not wash. I am sorry for that terminology as well.
Some time ago, I attended a professional lecture on restoring part of southern Exmoor to a peat bog so that it would hold more water and release it more slowly into the River Barle and the River Exe systems. It had something to do with pumping and repumping water back into Wimbleball reservoir, which I shall not go into. I nicknamed the scheme the “Exmoor sponge”. I do not think anyone else has used that term. There is nothing wrong with such projects, but if they do not have durable management structures that are proof against misuse for commercial objectives, neglect because of spending cuts, simply being forgotten, or participant landowners deciding that there are better land uses that they would rather adopt, they will fail. There need to be more durable ways of dealing with these things. That is the sum total of the points that I wish to make. The last of them probably goes a bit beyond the amendment proposed by the noble Lord, Lord Shipley, but it was worth mentioning in the context of what was said by the noble Lord, Lord Campbell-Savours.
My Lords, the amendment would set up a review of recent outcomes of planning policy in terms of flood risk for new developments. It has received widespread support around the Committee.
The noble Lord, Lord Moynihan, has already highlighted how the market will change following recent events. In view of the terrible situation that has resulted from recent weather events in Somerset and the Thames Valley, which may well trigger a wide-ranging review of flood risk policy, it makes sense to ask why there has been more building on low-lying and flood risk areas in the past four years, even allowing for the guidance to which the Minister has already referred today. There has been plenty of notice since 2007 that not all property in areas that might be developed would be eligible for flood insurance. Recent floods have highlighted that there may be errors in the guidance. Nor have successful protection measures been achieved.
Why has planning allowed development to take place against a background of increased perception of flooding potential following the floods in 2007 and in 2012? As the Government, the Environment Agency and planning authorities—indeed, the whole country—will be reassessing flood defences and expenditure, a review of where we are now would make eminent sense.
I was struck by the comments of the noble Lord, Lord Shipley, on the cumulative development effect, which would be worth of the attention of the Environment Agency. The amendment has also prompted some interesting suggestions from my noble friend Lord Campbell-Savours, so it is worthy of further assessment by the Government.
My Lords, we strongly support the intention behind this amendment. The importance of managing the impact of flooding has been brought into very sharp focus recently, and my noble friend has made a cogent case for ensuring that all those involved, whether builders, local councils, inspectors or national organisations, are fulfilling what is required of them in terms of capacity and performance in reducing flood risk.
My noble friends Lord Shipley and Lady Parminter made the case for a review of planning policy delivery. Planning policy for flooding is set out in the National Planning Policy Framework. The framework was published by the Department for Communities and Local Government in March 2012 following extensive public consultation and is supported by practice guidance. It sets strict tests to protect people and property from flooding, which all local councils must follow. We have been very clear that where these tests are not met, new development should not be allowed.
The framework states that councils should plan the location of new development to avoid areas of flood risk where possible. Only if no sites are available in areas of lower risk of flooding can local councils even begin to consider whether to allow development in areas where there is a higher risk. For logical reasons, this is known in planning terminology as the sequential test. Where the sequential test has shown that it is not possible, consistent with wider sustainability objectives, to locate in an area with a lower risk of flooding, then—depending on the flood risk—a second stringent test must be met before a development can go ahead. This is called the exception test, which provides a very strong safeguard. To pass the exception test, you must show that the development provides wider benefits to the community that outweigh the flood risk and that it will be safe for its lifetime without increasing flood risk elsewhere—which was another point that noble Lords flagged up. Where possible, the development will reduce flood risk overall, such as through new flood defences. If there is a risk of flooding, a planning application has to be supported by a site-specific flood risk assessment. This is important because, where there is a risk of flooding, councils should give the go-ahead to new development only where, following the sequential and, if required, the exception tests, it can be demonstrated that what is to be built is flood resilient and resistant, and, as necessary, includes safe access and escape routes. Quite simply, in terms of flood risk, if there are better sites for developments, or developments demonstrated to be necessary are not made safe, they should not be permitted.
The delivery of planning policy is subject to strict scrutiny. Very importantly, local plans, which allocate land for new development, are tested at a public examination by an independent inspector. Plans must be consistent with national policy in order to be found sound and be based on an up-to-date assessment of flood risk—the strategic flood risk assessment. All councils are obliged to have these strategic flood risk assessments.
Under planning law, applications for new development must be determined in accordance with the local plan unless material considerations indicate otherwise. The National Planning Policy Framework would be a material consideration, as would any new information on flooding, such as updated flood maps published by the Environment Agency.
As well as inputting to the preparation of local plans, the Environment Agency is a statutory consultee for applications in flood risk areas, so local councils must consult it. The agency will advise local councils in line with the policy in the framework. We know that local councils pay attention to that advice because the agency both monitors and reports publicly on the planning applications on which it was consulted for detailed flood risk advice and on the impact of its advice. My noble friend noted the number of applications that the Environment Agency sees.
My noble friend Lord Shipley asked whether councils have the expertise to deal with flooding. We have no reason to believe that they do not have sufficient access to the right advice and expertise. The Environment Agency has standing advice on its website for councils to use for lower-risk applications. As I have mentioned, it has a statutory duty to comment on applications where there is a higher flood risk.
As I have mentioned, the Environment Agency is a statutory consultee for both residential and commercial planning applications. It takes a risk-based approach to examining applications. It concentrates on major developments, rather than on applications for individual properties, and on areas at the highest risk of flooding.
I can reassure noble Lords that the most recent agency report, for 2012-13, shows that 99% of proposed new residential units to which the Environment Agency objected on flood risk grounds were decided in line with agency advice where those decisions are known. This proportion has remained very similar over a number of years.
In the case of the Environment Agency lodging an objection, in what proportion of cases was it informed of the outcome? In the review that the adaptation sub-committee carried out in 2012, we found that in nearly a third of instances where the Environment Agency had been consulted, it did not know the outcome because it had not been informed. Has that figure changed?
I hope to get an inspired answer any second in order to be able to tell the noble Lord. If I do not get inspired, I will write to him.
I remind noble Lords that the Environment Agency is already required, under Section 18 of the Flood and Water Management Act, to report on the delivery of the national flood and coastal erosion risk management strategy for England. These reports must include information on all sources of flood risk and coastal erosion, and cover the work of all of the relevant accountable authorities. To reassure the noble Earl, Lord Lytton, the Environment Agency helps to provide the national overview that he seeks.
My noble friend Lord Shipley suggested that we need to know better whether properties built since 2009 are flooding or making others flood. One of the benefits of the memorandum of understanding between the Government and insurers last year, which I will come on to in the next group, is that for the first time we will have access to claims from flooding. This information will be used by the Environment Agency and its equivalents to target flood risk investment and could be used to inform policy development. In this context, I also note what the noble Lord, Lord Krebs, said about his data sets. Clearly, the more information we have, the better. I am sure that those data sets will be of interest both to Defra and to the Environment Agency.
Let me see whether I am inspired by the note I have been handed.
Where the outcome is not known, which is what the noble Lord, Lord Krebs, is talking about, the agency is satisfied that there is no significant difference in the outcomes between those cases reported and those not reported by authorities. I hope that that reassures the noble Lord. It is, of course, important that all these areas continue to be probed, because everybody needs to be reassured that that is, indeed, the case.
Coming back to the assessments that are taking place, high-level reports are produced annually, with more detailed reports provided to coincide with the six-year cycle of the flood risk regulations. Further interim reports may be produced as directed by the Government to support policy decisions such as future government spending reviews. The Government also conduct regular reviews of the effectiveness of policy delivery. For example, a review of the impact of the new partnership approach to flood risk management funding has just concluded. There are also two reviews of flood risk management in progress at the moment and one at a scoping stage. I listened to the comparison by the noble Lord, Lord Campbell-Savours, of the situations in Abingdon and Keswick. My noble friend Lord Younger, who was in his place a moment ago, noted this with interest and passed me a very interesting comment, but I hear what the noble Lord said and I will make sure that his suggestion is fed through to the relevant authorities.
Coming back to the general reviews, in addition to those I mentioned, my right honourable friend Oliver Letwin MP is leading a review of the lessons learned from the recent flooding, particularly the tidal surge, and the other review is looking at the resilience of key infrastructure to major coastal flooding. Both of these are expected to complete in the spring. Defra is also scoping an evaluation of the effectiveness of the Flood and Water Management Act 2010, which I hope will reassure my noble friend and which will initially focus on local flood risk management. Under the Act, lead local flood authorities and other risk management authorities have a duty to co-operate with each other, as he noted, to ensure that constructive and active engagement takes place and helps to build local relationships between relevant authorities within and across operational boundaries. We noted what he said about Northumberland and Somerset. Work on this evaluation is anticipated to start later this year. We therefore feel that proposed new paragraphs (b) and (c) of this amendment would duplicate existing planned work.
I hope that my noble friend is reassured by what I have said and that he will be content to withdraw his amendment.
My Lords, I am grateful to all those who have taken part in this debate. I shall just take up one question posed by the noble Earl, Lord Lytton, about whether this concerns only new properties. The amendment refers to new developments but, for the avoidance of any doubt, that includes any building post-2009, not any building purely in the future. I am very grateful for the Minister’s reassurances. We have to think further about what she said, in particular about the role of the Environment Agency as a statutory consultee and the extent to which that might be extended, but I think we could look at that again on Report, when we have had time to consider the points raised in greater detail. I beg leave to withdraw the amendment.
Amendment 155A withdrawn.
156: Clause 51, page 107, line 21, at end insert—
“(8) Prior to making any regulations under subsection (5), the Secretary of State shall require the Committee on Climate Change to provide current and projected estimates of the number of properties that would be eligible for—
(a) inclusion in the Flood Reinsurance Scheme;(b) the value of levy required under section 53; and(c) the likelihood of additional levy or contributions being needed from time to time.”
My Lords, I shall also speak to Amendment 158. As we have discussed, actuarial calculations for the establishment of Flood Re have had to be pretty robust and tight, reflecting the level of risk assessed by the insurers and by the Government at this time, but we also all know that flood risk will change over time. We cannot, therefore, establish Flood Re on a totally static basis; it needs to be a dynamic process. The reality is that the numbers at high risk of flood damage are likely to increase, particularly, but not solely, because of the effects of climate change. The Committee on Climate Change and its Adaptation Sub-Committee are the key adviser to the Government on the numbers likely to be at risk of flood.
Over the next few years, Flood Re is supposed to operate in an area in which the Committee on Climate Change has already indicated there will be a significant increase in the numbers at significant risk of flood. The definition of “significant” in this context is one in 75 years. At the moment, that relates to about 370,000 properties. The information that Defra put into the basis of the impact assessment derived from the Committee on Climate Change statistics. I am not sure whether it is the database to which the noble Lord, Lord Krebs, referred or some other, but given that we are working on a 25-year timescale it said that this figure will have increased by the 2020s to between 475,000 and 825,000 and by the 2030s to between 525,000 and 1 million. That is a pretty big increase. By the end of the 2030s, the end of the 25-year period, it is potentially three times what we are talking about now.
Obviously, some mitigation will happen, but regrettably the level of flood defence expenditure fell—it is now rising again, but it fell—and the figures that have been used in these calculations show that there is a gap between the required expenditure and what is likely to be needed of about £500 million over the period of 20 years. That means that we have a significant problem in defining what is at risk in 10 or 20 years and therefore where Flood Re has to get to in terms of its financial arithmetic and the number of properties that it is going to cover. The Committee on Climate Change can advise on the likely change in crude numbers—indeed, it already has. It can apply probabilities to that, it can indicate what degree of mitigation, at what likely cost, is likely to offset this and it can look at the change in the nature of the risk and the areas to which it applies. It is important that both the Government and the administrator of Flood Re get strong, independent assessments of this changing and growing risk.
Indeed, this goes beyond climate change; there are the interrelationships between climate change, population growth, distribution of population, development pressures, water resource pressures, ecological consequences and so forth. The Committee on Climate Change and the Adaptation Sub-Committee are the authoritative bodies to do that and their role should be written into the Bill. My Amendment 156 does that and Amendment 158 would then require the Secretary of State to take notice of the advice from the Committee on Climate Change when setting targets under Clause 58 and more broadly. I beg to move.
My Lords, I am grateful to the noble Lord, Lord Whitty, for suggesting an additional task for the Adaptation Sub-Committee of the Committee on Climate Change. While recognising that that is a task that we could carry out, I just say that one important corollary would be that the committee would need access to the relevant data from Flood Re, Defra and the insurance industry. Given access to that information, the committee could, as the noble Lord suggests, provide an independent assessment for the Government, which I think would be helpful in seeing how Flood Re is progressing.
My Lords, perhaps I may ask the noble Lord whether the requirements should be imposed before the regulations that bring the Flood Re scheme into effect, or whether he is talking only about subsequent regulations. If that task has to be undertaken at the beginning, it might imperil the start of Flood Re.
My Lords, I am grateful to the noble Lord, Lord Whitty, for drawing attention to his wish to ensure that that the policies set out in the legislation respond to the demands that climate change may bring in future—in particular, by including a formal role for the Committee on Climate Change. I was not entirely sure whether the noble Lord, Lord Krebs, accepted that formal role.
We fully agree that climate change and adaptation to it are vital. The noble Lord, Lord Whitty, added the additional factor of population growth. He rightly challenges us on the uncertainty of the future and we are very much aware of the need to plan for the future in this regard.
The Committee on Climate Change and, in this respect, its Adaptation Sub-Committee play a very important role in providing independent advice to the Government. The information and analysis provided since the committee’s inception have helped to shape the debate on climate change. Although the evidence of climate change is becoming increasingly compelling, it is clear that we need to do more to understand and plan for its impacts. This is a challenging task, given how interrelated and unpredictable those effects are. We have seen how variable the jet stream has been over the past few years, for example, and how it has brought us drought and flood.
Although, clearly, dealing with the current devastating flooding is the immediate absolute priority, we also need to reflect on our management of flood risk and assess our preparedness for climate change. The Government published the UK’s first national adaptation programme report in July 2013, which sets out the action that we propose to take. There is great expertise in this country, not least in your Lordships’ Chamber, which we can access and are accessing, as well as learning lessons from elsewhere.
Specifically in relation to Flood Re, I assure noble Lords that climate change projections were considered alongside other risk factors during the design of the policy and that the effects of climate change will continue to be considered during future levy-setting discussions. I remind your Lordships that in the memorandum of understanding with the industry that has been used to craft the Bill—I mentioned it in relation to a previous group—we have recognised the importance of the programme of flood defence and have committed to a specified amount of expenditure for 2015-16. However, we believe that advising on the scope and financial parameters for the transitional Flood Re scheme is a role for the insurance industry and would be outside the current remit of the Committee on Climate Change.
To clarify, the number of policies that would be eligible for Flood Re is based solely on the cost of the flood risk component of any policy, which is set by the insurers. This assessment of flood risk will indeed change over time, as the noble Lord, Lord Whitty, acknowledged, and it would not be possible for the Committee on Climate Change to provide any estimates without detailed knowledge of industry pricing models. Similarly, the value of the levy required and the likelihood of the need of any additional contribution by insurers is based on a number of financial parameters that could change year on year. Those include the level of premiums received, the cost of reinsurance and the amount of levy collected.
The Government and the Association of British Insurers have worked hard to determine the value of the levy required and the likelihood of the need for additional contributions, based on industry data and assumptions that were subject to independent review by Professor Stephen Diacon. In addition, extensive modelling, using a model that was quality-assured by the Government Actuary’s Department, has been carried out by the Government using there data, as part of both the pre-consultation and post-consultation impact assessments.
Looking forward, the Environment Agency will continue to collect and analyse data on flood risk, which will feed into the Government’s ongoing assessment of the scheme. In addition, as Flood Re is directly accountable to Parliament, detailed audited information about Flood Re’s ongoing operation will be reported to Parliament regularly.
I turn now to the proposed role of the Committee on Climate Change in advising the Secretary of State on setting the target number in relation to the flood insurance obligation. Clause 58 gives the Secretary of State the power periodically to set a target for the proportion of properties on a register of properties at greater flood risk that relevant insurers are collectively required to issue with insurance policies. The register, to be created by the Environment Agency and its counterparts in the devolved Administrations, will be based on the flood risk maps published by those bodies.
The number of properties indicated as subject to flood risk may change with time, as a consequence of climate change or through better information and mapping. The Secretary of State would set an overall target for the number of registered properties that the industry as a whole needs to cover. In setting this target, the Secretary of State would consider evidence on existing take-up rates of insurance and other relevant data. This could include advice from the Committee on Climate Change, should the Secretary of State wish.
The setting of the target number is a decision regarding the appropriate breadth of support that should be given by this financial support mechanism. Again, we believe that advising on the target number would be outside the committee’s current remit and, for reasons discussed in relation to Flood Re, would not be the most appropriate use of its resources or expertise.
Although, for the reasons that I have set out, we do not feel able to accept these specific amendments, I would like to return for a moment to the wider spirit behind them. We absolutely recognise that climate change is a most important consideration for the management of future flood risk and we value the expertise of the Committee on Climate Change. We are pleased that the independent Adaptation Sub-Committee will be publishing a revised climate change risk assessment report in summer 2016. We will consider that evidence and any implications for flood risk management carefully once the report is received.
Noble Lords know about various measures that we are putting in place to reduce the risks of flooding and coastal erosion, so I will not expand on that right now. I hope that the noble Lord will have been reassured by what I have had to say, setting what we are doing here in the context of our deep understanding of the potential implications of climate change and the unpredictability of measuring it into the future. I hope that he will withdraw the amendment.
My Lords, I thank the Minister, who clearly recognises the issue. I also thank the noble Lord, Lord Krebs, who, I thought, accepted the additional responsibility—although slightly conditionally. The conditionality was that the financial information, at least in broad terms, would be available to the committee.
I am a bit disappointed by the Minister’s reply. She recognises clearly the importance of climate change in defining the nature and scope of the problem. The Government have an authoritative independent committee available to them to feed into their deliberations, along with the administrator of Flood Re, but she is saying, “Actually, the Minister might or might not take notice of what the Climate Change Committee says, but, in any case, it is not the role of the Climate Change Committee and the Adaptation Sub-Committee to talk about financial risk assessment”. That is not what we are saying, though. To feed in to the risk assessment, you need the most authoritative input that you can get, in order that the financial structure can be changed to reflect those increased risks, changed probabilities or changed distribution of risk. I would have thought that it would be useful to the Government to have it written into the Bill that they have an authoritative input on this from the Committee on Climate Change.
In response to the noble Lord, Lord Ashton, I am not looking for this input before we get Flood Re off the ground. I will be looking for an ongoing input. The administrator of Flood Re, as well as the Government, is going to look increasingly for this kind of authoritative input. At the end of the day Flood Re is—despite its statutory base and its reporting to Parliament—a private body informed by the expertise of the insurance industry, but that expertise is itself informed by the best information that can be got on risk. In my view, the best information that can be got is probably from the noble Lord, Lord Krebs, and the noble Lord, Lord Deben, who is no longer in his place. I would have thought they would be the best and most authoritative sources to be relied on. I am surprised that they are not prepared to get that reflected in the Bill. For the moment, I withdraw my amendment.
Amendment 156 withdrawn.
Clause 51 agreed.
Clauses 52 and 53 agreed.
Clause 54: Scheme administration
Amendments 156A and 156B not moved.
156C: Clause 54, page 108, line 25, at end insert—
“(e) the need to build awareness of local flood risk amongst beneficiaries of the FR Scheme,(f) the need to inform beneficiaries of the FR Scheme of the need to achieve transition to risk-reflective prices as mentioned in paragraph (d).”
My Lords, in speaking to this amendment I will also speak to the other amendments standing in my name. I can be brief because the issues raised in the first of these amendments, and indeed in the second, have already been thoroughly explored by the noble Baroness, Lady Parminter, in her amendment.
Amendments 156C and 156D are really about information for householders. I find it hard to see why one would object to giving householders information that will help them now and in the future. The first part of Amendment 156C simply asks that Flood Re should build awareness among householders of their own flood risk. Earlier this afternoon we heard the noble Lord, Lord Crickhowell, alluding to a Defra website where information could be garnered, but the fact remains, from surveys of householders, that many of them are unaware that they are living in a flood risk area, and Flood Re has been designed to be invisible to the households concerned. As currently cast it will not give them any source of information. It is important that we incorporate in the Bill the requirement for the Flood Re administrator to give households information about their risk.
The other part of this, in the addition of proposed new paragraph (f) at the end of line 25, is to again alert householders who might be affected to the fact that Flood Re is not a permanent arrangement, and that there will be a transition. The transition is over a long period—over 25 years, as we are now familiar with—but it is important that householders over that 25-year period take action if they are at risk, to reduce their risk. Therefore it is important for households to have transparent information about the nature of the transition to risk-reflective prices that will arise at the end of Flood Re. It is hard to object to giving consumers information.
I now move to Amendment 156D, the second of my amendments. Again, I can be brief about this. It requires Flood Re to be explicit about the plan for transition, and to publish a transition plan so that the householder concerned will know what to expect—otherwise there will not be clarity for households. Difficult decisions to gradually withdraw the benefits of the scheme may continually be postponed, because it is always difficult to tell householders that they are going to lose a certain benefit that would arise through the coverage of Flood Re. In order to avoid confusion it is important that the Bill sets out a requirement to give a plan for the future, and therefore prevent Flood Re becoming a permanent and growing burden on the costs of insurance paid by other policyholders. So the transition must take place at the end of the 25-year period, and my Amendment 156D seeks to ensure that a plan for the transition is published, so that we can have more confidence that it will take place, and when it will take place.
Amendment 156F has again largely been explored in earlier discussions of the amendment of the noble Baroness, Lady Parminter. This is a way of proposing the same thing but in a slightly different form. The discussion, as noble Lords will remember, was whether some of the forecast surplus from Flood Re should be invested in mitigation. This is a form of investment now to save costs in the future. With the likely impacts of climate change, uncertain though they are, it is nevertheless likely that the extreme events we have witnessed—for example, in the past couple of months—will become more frequent. We cannot tell by how much and when that will happen. Nevertheless, investment today to help make households more resilient is likely to save costs tomorrow.
My amendment does not specify a pattern of investment, but recognises that there could be surpluses in the early years of Flood Re. It is asking the administrator to encourage and support households to address the resilience of their properties and consider options, including investment in mitigation strategies to make properties more resilient, and to publish a plan for how Flood Re would use its resources to address the underlying risk. This is perhaps a short-term cost to Flood Re, but a long-term saving. It is an “invest to save” amendment.
Finally, I move on to Amendment 156G, which is something that has not been discussed so far. I will explore this in a little more detail. The point of this amendment is to help preserve incentives on insurance companies and households to keep the costs of flood claims down. This is important, because unless claim costs are kept under control, the levy on the bills of other households will need to rise. Under current arrangements insurers have the incentive to get householders back in their homes as soon as possible, because providing people with temporary accommodation costs insurers money. In the future, Flood Re is set to bear all of these costs under the current proposals, leaving no liability with the insurer managing the claim. So what incentive will there be to keep claim costs down and get people home as quickly as possible? A similar lack of insurer “skin in the game” has been blamed by the Competition Commission for a £150 million to £200 million rise in motor insurance premiums. Insurers may not care if home premiums rise if it affects the whole market equally. Auditing of insurer claim costs post-event will be too little, too late, to control costs.
Reinsurance products require an element of risk-sharing between the insurer and reinsurer. This is a sensible precaution by the reinsurer to avoid them being hit with avoidable costs. Risk sharing usually takes the form of a quota-share agreement whereby the insurer agrees to retain a share of all claims, commonly 25%. There is no reason why Flood Re cannot operate in this way, given that it is standard practice in the market.
If we had such an insurance-sharing arrangement, it would have a number of benefits. It would encourage insurers to properly assess flood risk, otherwise they might be tempted to take a simplistic or risk-averse approach and cede more properties to Flood Re than ought to be there, which would mean high-risk householders paying more for their insurance than they should. An element of risk retention will require insurers to assess the risk left with them. Secondly, it would encourage high-risk customers to shop around and get the best deal. In shopping around, they could well find an insurer with a lower risk assessment for their property who was willing to offer a policy below the Flood Re cap. Thirdly, risk-sharing would make Flood Re more likely to receive state aid approval, as appropriate risk-sharing is likely to be one of the factors that the European Commission would consider in any investigation.
The amendment would also introduce an element of risk-reflective pricing for households in the Flood Re pool. I acknowledge that this has the downside that those at the highest flood risk may pay somewhat more for their insurance than those who are just within Flood Re’s scope. People will be asked to pay a small risk-reflective element premium in addition to the standard Flood Re cap, but that would reflect the important role in managing claims that householders themselves can play. Householders can take a number of actions to reduce their risk of flooding and the size of any potential claim; we heard about some of those in earlier discussions. For example, we need to encourage people to sign up to flood warnings, to heed them when they are issued and to move valuable possessions and property away from floodwater if they can.
It seems appropriate that high-risk households, along with insurers, should retain a share of the risk in line with their scope to influence the size of potential claims. There could be a concern—a very real one—that this would make insurance policies less affordable, but the thresholds could be adjusted so that the net effect was zero without increasing the size of the levy. People concerned by the risk-reflective element of their bill could shop around to find the insurer with the lowest risk assessment for their property.
The amendment would cement into the heart of Flood Re the important principle of appropriate risk-sharing. The exact proportion of each claim borne by the insurer could be subject to further debate and set in regulations, but at least the amendment would ensure that the debate was had when the time came. I beg to move.
My Lords, I added my name to Amendment 156D of the noble Lord, Lord Krebs, and my related probing Amendment 156E has been grouped with it.
At present, the Bill states that the Secretary of State has the option to bring in a review process for Flood Re, but provides no detail. The first amendment, as the noble Lord pointed out, requires the scheme administrator to publish a plan to achieve a transition to risk-reflective pricing.
My second amendment would require Flood Re to publish the intended framework for reviews, outlining the decisions that needed to be made at each review point. Why is that important? The Government’s consultation document on Flood Re specified that reviews will be held in order that there should be a gradual transition to risk-reflective pricing. Discussions have centred on reviews every five years and the impact assessment for flood risk is based on that hypothesis, but there is nothing in the legislation to confirm that this will be so.
Getting a commitment to a five-yearly review is critical. Flood Re is designed by the Government to expire in 20 to 25 years’ time, with review points where decisions can be taken to reduce the benefit of the pool to claimants and the levy to all policyholders. If a linear approach is taken, this might result in a 20% drop in the levy, and the benefits, every five years. The potential problems are that the reviews could be more frequent, or never. The Treasury could require the transition period to be shortened, thus not allowing the necessary flood risk management investment to take place, or it could set the percentage drop in the levy to be higher in the earlier period. The reason why it might do so would be that under OECD rules the levy is considered to be a tax. Removing it early would reduce the percentage tax burden on the state.
The issue, though, is not just when the reviews take place but what information they provide so that the Government and parliamentarians have the necessary information to make informed decisions. As such, it would seem important to define the critical parameters in the review in some detail at the outset, understanding exactly what areas beyond affordability and accessibility will be judged to see whether or not the scheme is effective. I hope therefore that the Minister will put on record the Government’s intentions in this regard so that we can have reassurances that the scheme will achieve the outcomes that we all want.
My Lords, I particularly welcome Amendment 156C, moved so eloquently by the noble Lord, Lord Krebs, as it enables me to raise a series of allied issues. The first is that, Flood Re or no Flood Re, we are all on notice that the cross-subsidy of flood risk needs to be replaced by individual risk assessments. The reason for that is our better geographical knowledge and the unsustainability of the continued mutualisation of risk in those circumstances. I have absolutely no argument with that.
One issue of concern is the data produced by the Environment Agency. Obviously, those data are very important for the industry and for consultants, but they are equally important for individuals because, if we are moving to individual assessment, we must have some means of identifying the individual impact on a per property basis. I referred earlier today to my discussions with Philip Wilbourn, a very eminent environmental surveyor and valuer from the north of England. He allowed me to circulate an e-mail to a number of noble Lords setting out his views, which I have done, but there is a particular bit that I would like to repeat. He refers to,
“the data published by the various agencies, including the Environment Agency”.
Bear in mind that this is someone who carries out evaluations and does assessments on individual properties or groups of properties for a variety of different purposes.
In his e-mail, Philip Wilbourn says that he cannot use the data for commercial purposes because he is prohibited from doing so. Then he says that there is no online ordering service to acquire data for reporting purposes, and he is forced to acquire it from GroundSure or Landmark, two of the authorised resellers, at what he describes as high cost. He says:
“The data reported by commercial companies often varies depending upon the royalty return”,
which seems to be quite the wrong trigger for objective data. He tells me that the costs cannot be absorbed by residential valuers and that the banks, for which these valuations are produced, will not allow such data as a disbursement for the reports that are sent to them. His e-mail continues:
“When data is ordered direct from the EA, it can take three weeks to be sent through depending on the region”,
and he says that he has tested that.
The scale of resolution on the Environment Agency website is 1:5,000, which does not enable a particularly accurate identification on a per property basis. The Scottish Environment Protection Agency’s website fares rather worse because the scale there is 1:25,000, so individual property analysis by the home owner is clearly going to be difficult. These are the data that are supplied to insurers to make decisions.
Of course, what happens? It gets boiled down to a postcode approach—the “postcode lottery” of which we constantly hear many examples. He says:
“The problem with postcodes is that many home owners/businesses may be paying more than they should”,
and he gives an example of a postcode—in I do not know what part of the country, but it is obviously an urban area—which is neatly bisected by a blue-ink line of flood risk.
There is a particular issue here as to whether the data that are produced by this public agency, for public consumption and for the benefit of society as a whole, will be available at reasonable cost—let us not say that it should be free—for the home owner and individual consumer. That is the question that I pose in the context of this amendment.
My Lords, I broadly support most of these amendments, but I have a few queries. I support the first two amendments, Amendments 156C and 156D, unequivocally. It should be part of the role of Flood Re to help raise awareness, both among policyholders and in the community at large, and it will need to do so in conjunction with the Environment Agency, local authorities and so forth. However, clearly, the insurers also have a responsibility, as is reflected in these amendments. This will help both the beneficiaries and the insurers to move to a more systematic, cost-reflective basis for the whole system over time. It is also true that the administrator should be required to produce a plan for the operation of that scheme, as provided for in Amendment 156D. There must also be an overall longer-term plan for transition over the 25 years of the plan, as is proposed by the noble Lord, Lord Krebs, and the noble Baroness, Lady Parminter.
I am less sure that we should stipulate a five-year review period in legislation. In a sense, the scheme is always under review and will be changed in the light of new advice or new experience of flood conditions. Tying this down to every five years may not be the most sensible thing to do. Part of that assessment would be to indicate what measures would be needed to reduce long-term costs, as provided for in Amendment 156F. Insurers may encourage both individual and collective schemes of mitigation. As I have said before, this may involve mitigation by the policyholders, as a condition of that policy, or as a “cream-off” from compensation received in order to renew the policy. The noble Lord referred to Flood Re’s assessment of the need to invest in order to save in the longer term. I understand all of that. I am, however, a little worried by the term “subsidising”, which is included in Amendment 156E. I am not sure who is subsidising whom in this context. If the noble Lord means measures such as these, I think that is appropriate, but I would not use that term, as it might suggest a cross-subsidy over and above what is already provided for in the scheme.
Even after the noble Lord’s gallant attempt at explaining Amendment 156G, I do not follow it fully. As I understand it, the objective is to keep the levy cost down for those outside the scheme and the means would be some sort of quota-sharing agreement. I bow to the greater expertise of those involved in the insurance industry to tell me whether that will work. Subject to those queries and my slight lack of comprehension on the last amendment, the noble Lord, Lord Krebs, and the noble Baroness are in the right territory with these amendments.
My Lords, I concur with the noble Lord, Lord Krebs, in Amendment 156C that it is important that householders whose policies are ceded to Flood Re are aware both of the flood risk in their vicinity and of the transitional nature of the scheme. Knowing about flood risk is vital so that households can take simple steps, such as signing up to free flood warnings, as well as investigating longer-term options for managing their flood risk, and can understand the likely impact on their future premiums of the withdrawal of the subsidy from which they are benefiting.
We will work with insurers and Flood Re to support people at flood risk to plan for and adjust to risk-based pricing. I hope that noble Lords will be reassured to know that we have agreed with the ABI that insurers will be required to provide information to customers about their flood risk, Flood Re and the actions that they can take to manage this, both when a property is ceded to Flood Re and at the point of a claim. Of course, raising awareness of flood risk remains primarily a matter for risk management authorities, such as the Environment Agency, so it will be important to ensure that any action by insurers on behalf of Flood Re complements their work.
Turning to Amendment 156D, I understand that by changing the phrasing of the power in Clause 54(3) from “may” to “shall”, the notion that Flood Re is a transitional measure is strengthened. I point to the Government’s stated policy objective in the June 2013 public consultation that,
“there should be a gradual transition towards more risk-reflective prices”,
and to the existing provisions in subsection (2) of the clause, which may require the administrator to have regard to the transitional nature of the scheme in discharging its functions. We have been clear that there should be a gradual transition to more risk-reflective prices and that we are committed to ensuring that the scheme retains incentives for flood risk to be managed. The Government will not designate the scheme until we are satisfied with the industry’s proposals. As I have already said today, the regulations designating the scheme will be subject to public consultation and we are currently considering the recommendation of the Delegated Powers Committee that regulations made under this clause should be subject to the affirmative procedure. While I recognise that the shift from a permissive power to a firm expectation could be claimed to underscore Flood Re’s duties in this regard, I believe that there is sufficient clarity in Flood Re’s role to manage the transition to risk-reflective pricing and for that to be achieved through the current drafting of the Bill.
Turning to Amendment 156E, from my noble friend Lady Parminter, I can confirm that it is, as she said, our firm intention that the policy will be reviewed every five years by the Government. This review will assess the level at which the levy and the eligibility thresholds are set to ensure that the policy objectives of Flood Re continue to be delivered, including the transition to risk-reflective pricing. The plan will be a public document and Parliament will be able to use existing powers to call Flood Re’s staff to answer any questions. On the point made by the noble Lord, Lord Whitty, in the case that Flood Re’s finances are out of kilter or the scheme is not operating effectively, that review will be brought forward. We are working with the ABI to define this process. The amount of the levy and the thresholds will be set out in secondary legislation. We intend those instruments to have a review period, always accepting that they might be reviewed early if circumstances require it. In addition, as I have just said, we are taking a power to make Flood Re’s responsible officer directly accountable to Parliament for the scheme’s value for money and for propriety and regularity. There are powers to require Flood Re’s audited accounts to be laid before Parliament and provided to the Comptroller and Auditor-General to examine and compare against Flood Re’s published transition plan.
I now turn to Amendment 156F, which would require the Flood Re scheme administrator to set out how it intends to manage the transition to risk-reflective pricing by investing in flood risk mitigation measures. Actions taken by households, communities, businesses and Government to reduce flood risk are the best and most cost-effective way to secure affordable insurance for households at risk of flooding in the long term, and I recognise the noble Lord’s intention to see this reflected in the Bill. As I said earlier, Flood Re will have a duty to have regard to the need both to act in the public interest and to ensure economy, efficiency and effectiveness in the discharge of its functions. It may well be that the Flood Re administrator decides in due course that investments of the sort that the noble Lord would like to see present an appropriate means of complying with these requirements where there is a clear case for doing so. Nothing in the Bill precludes this. However, we think that it is important for Flood Re to retain flexibility in the way that it discharges its public-interest duty and plans for transition, in order to ensure that it is in a position to balance these requirements against its core obligations as a reinsurer. Accordingly, we do not think that it would be appropriate to mandate Flood Re to subsidise flood risk mitigation measures.
Finally, Amendment 156G would limit the maximum proportion of the cost of a claim that an insurer could reclaim from the Flood Re scheme to a specific amount, as part of the Flood Re scheme’s management of transition to risk-reflective pricing. I understand that the intention is that this would restore an element of risk-reflective pricing to insurance policies in Flood Re. This could create a financial incentive for households and insurers to put in place the necessary measures to manage their flood risk. However, price is one, but not the only, signal to households for achieving that and our proposals for ensuring that households have the necessary information to make informed choices about managing their risk should also act to drive resilient behaviours. While superficially attractive, sharing an element of the risk between Flood Re and households would also have the effect of creating a more complex system to administer, thereby adding to the overall costs of the scheme. Having listened to what I have said, I hope that the noble Lord will be prepared to withdraw his amendment.
My Lords, I thank the Minister for those comments in response. Above all, my amendments are about trying to put risk communication and management at the heart of Flood Re; we have heard that in relation to previous amendments earlier this afternoon. I am pleased to hear from the Minister that this is indeed the Government’s intention. I look forward with great interest to seeing how that develops through to the next stage of the Bill.
I also thank other noble Lords who have taken part in discussion of these amendments. On the frank feedback of the noble Lord, Lord Whitty, on my lecturing skills, in Oxford we normally do that anonymously. This was non-anonymous feedback on my lecturing skills in explaining risk sharing; I will take that away and consider it for the future. In the mean time, however, I beg leave to withdraw the amendment.
Amendment 156C withdrawn.
Amendments 156D to 156G not moved.
157: Clause 54, page 109, line 30, after “persons” insert “, or descriptions of persons,”
My Lords, I take this opportunity to draw noble Lords’ attention to government amendments tabled to Clauses 54, 70, 72 and 80. These are generally minor and technical amendments but I draw your Lordships’ attention to two areas which may be of particular interest.
Amendments 162 and 163 concern the winding up of the Flood Re scheme under Clause 70 and the distribution of any reserves. As part of the operation of the Flood Re scheme it is expected that Flood Re will build up capital reserves. These reserves would contribute to the payment of the scheme liabilities including flood insurance claims for those households whose premiums have been ceded. It is expected that these reserves will be reduced over the life of the scheme and taken into account as part of the five-yearly levy-setting discussions. At the end of the scheme, Flood Re will still hold some level of residual capital reserves. Clause 70 allows for an order to be made requiring a specific amount of those reserves to be transferred to the Secretary of State upon closure of the scheme.
These amendments require that, in preparation for closure of the scheme, the Secretary of State must consult the Flood Re scheme administrator in relation to the transfer of any reserves, as defined for these purposes. This consultation must be carried out before an order requiring the transfer of reserves can be made. As drafted, this consultation duty will apply only at the end of the life of the Flood Re scheme and will not extend to any other circumstances. Because of this, I ought to mention that I may need to come forward with a further amendment in relation to reserves on Report.
The other area of interest relates to Clause 72 on internal drainage boards. This clause amends Schedule 3 to the Land Drainage Act 1991 to simplify the process by which internal drainage boards in England may seek to make organisational or structural changes. At the Welsh Government’s request, Amendments 164 and 165 extend Clause 72 to internal drainage boards and internal drainage districts in Wales. This will align the process throughout England and Wales. I beg to move.
Amendment 157 agreed.
Clause 54, as amended, agreed.
Clauses 55 to 57 agreed.
Clause 58: Target number
Amendment 158 not moved.
Clause 58 agreed.
Clause 59 agreed.
159: After Clause 59, insert the following new Clause—
“Flood Reinsurance Scheme: commencement
(1) The Secretary of State may by order (the “commencement order”) appoint a day on which section 51 is to come into force.
(2) An order under subsection (1)—
(a) shall be made by statutory instrument; and(b) may not be made unless a draft has been laid before and approved by a resolution of each House of Parliament.(3) The Secretary of State may only make an order under subsection (1) if a Flood Reinsurance Scheme national database has been established.
(4) Any Flood Reinsurance Scheme national database must—
(a) be accessible by the public;(b) outline a property’s risk of flooding; and(c) indicate if the property is covered by the Flood Reinsurance Scheme.”
My Lords, the amendment concerns information on the flood reinsurance scheme and would clarify that regulations will be brought forward to set the date of the commencement, and that Parliament will have approved by affirmative procedure the requirements on insurers of the scheme. Most critically, the proposed new clause would ensure that when these important Flood Re provisions come into effect, the database will have been established, as defined in Clause 61, with the relevant information in the right form as specified in subsection (4) of the proposed new clause. Subsection (4) of the proposed new clause says that the database must be accessible to everyone, and must allow them to check whether or not the property with which they are concerned is covered by the Flood Re scheme, and what the risk of the property flooding is.
I know that all noble Lords in the Chamber today share my heartfelt sympathies for those in Somerset and the Thames Valley who have been struggling to deal with these awful floods, and hope that this Flood Re scheme will make sure that people are able to get affordable and accessible insurance in future. The importance of the amendment is that it would provide information to someone buying a property as to whether their prospective purchase is at risk of flooding and, if so, if they will be able to get insurance under the scheme. It does not make sense that a family looking for a house in Somerset, the Thames Valley or elsewhere would be unaware of whether or not it was covered. It would add particular difficulties for them when it came to budgeting for the years ahead. It would be essential information when it came to looking for a mortgage. Lenders will require insurance on property to be able to advance money for the purchase, and will want to know whether or not the costs associated with the property are going to be high and whether insurance is affordable.
The terrible events of recent weeks show how important it is that the public should have confidence that the database is accessible, and that they will be able to access that part of the database to which insurance companies also have access. While the objective of the amendment is to emphasise transparency of and accessibility to information, including mapping, it also highlights the necessity for clarity on flood risk. The Minister may respond that subsection (4)(c) of the proposed new clause is opaque and refers only to property in the scheme. Yet the scheme must manage the situation and a transition over the period of the scheme. There must be a planned and collaborative withdrawal of the Flood Re scheme, and not a precipitate change into market conditions.
At present, it has been expressed that there is a lack of clarity concerning elements of property tenure and the mapping of risk in relation to the scheme, following changes made by the Environment Agency to information and websites in relation to the proposal of the scheme. The Minister has offered today to meet Members of the Committee concerning properties, and the scheme’s treatment of them following repeated flooding occasions. It is vital that the database is accessible as any updating occurs.
Amendment 161A, in the name of the noble Lord, Lord Oxburgh, also seems to me a good idea: it would bring the flood risks of properties further to the attention of householders. It is vital that clarity on flood insurance on a database is accessible throughout the period and is made a basic principle of the scheme. I beg to move.
Amendment 161A scarcely needs any detailed discussion: we have spoken this afternoon on a number of occasions of the importance of getting information to people. Certainly, this was a plea that came to us through many of the verbal representations that we had when we saw various interested groups in the lead-up to the discussion of this Bill. I simply offer this proposal to use council tax demands as a simple and almost cost-free way of disseminating information very widely, reminding people on an annual basis of their vulnerability to flood. It could serve as a portal to the various schemes and proposals that we discussed this afternoon.
My Lords, I am grateful to the noble Lords for their amendments. We are certainly supportive of their intentions in tabling them. The provision of information to households at risk of flooding is vital for managing the costs and impacts of flooding. We believe that it is essential that households benefiting from Flood Re should know about Flood Re and actions that they could take, for example, to reduce flood risk, allowing them to plan for the future. This was a key issue in the public consultation on flood insurance; some of the issues in these amendments echo some of the issues raised in earlier groups, which my noble friend Lord De Mauley has addressed.
The noble Lord, Lord Grantchester, rightly emphasised transparency; we certainly agree with that. As my noble friend Lord De Mauley has just pointed out, the Government have agreed with the Association of British Insurers the principle that insurers will be required to provide information to customers, both when a property is ceded to Flood Re and at the point of a claim, highlighting their flood risk. We are also keen to ensure that Flood Re plays its part in managing the transition to risk-reflective pricing, which we discussed earlier. We are continuing to develop with the ABI proposals in this area. We strongly believe that it is equally important that households outside Flood Re are aware of their flood risk, and the Government are committed to making this information available to the public. That is why we already have systems in place, through the Environment Agency and its devolved equivalents, to provide this information.
In England, the Environment Agency already makes comprehensive and searchable flood risk data available on its website. This has enabled people to check their flood risk from rivers and the sea and take action to prepare for flooding. The agency provides the same information for insurers to use. In addition, last December, the Environment Agency published surface water maps for all areas of England on its website and will produce a combined map, showing all sources of flooding, by December 2015. This work further helps improve public understanding of their flood risk and I hope noble Lords will be further reassured by that. While this places the onus on home owners to seek the information themselves, it provides clear information to households, is well established and is actively promoted by the agency.
The noble Lord, Lord Grantchester, raised the point about people buying properties. Clearly, anybody purchasing a property should check their flood risk by commissioning property surveys and searches or, alternatively, information on surface water risk that has been available in recent years on request from lead local flood authorities. If they conduct those kinds of searches and surveys, then this kind of information should emerge. Clearly, if, having discovered the flood risk, they discuss it with whomever they are buying their property from, the issue of Flood Re would no doubt enter their discussion.
Since June, we have been working with the insurance industry to go even further to improve the data available on flood risk. We have now agreed that the Environment Agency, and its devolved counterparts, will be able to access Flood Re’s data on where the highest-risk households are. This will help the Environment Agency to improve its own mapping of flood risk and will mean that our record levels of flood investment can be targeted at those areas most at risk.
To add to what I have said to the noble Lord, Lord Grantchester, I also point out that the seller is required to fill in a property information form—he will be aware of that—as part of the conveyancing process. This form asks questions about the flood risk history of the property, and if the seller provided misleading information there would be potential for the buyer to seek damages.
Is it not true that under the process to which the Minister refers, a purchaser would not know until lawyers had been involved and were beginning the exchange of documents? My noble friend’s amendment would mean that the buyer would have access to that information in advance. Is that not the distinction or do I have that wrong?
The noble Lord will know that a buyer can access the Environment Agency’s maps and see for themselves. When buyers are seeking to buy in a particular area, they usually check out all sorts of aspects: for example, where the schools are and public transport is. It will increasingly become a concern of people seeking to buy a property, given what has happened in recent weeks, to have a look at what the potential flood risk might be. They have access to those maps before they even start down the road of any potential purchase.
Advice on obtaining flood insurance is also readily available. The National Flood Forum offers independent advice and guidance on how to go about getting insurance and how to reduce premiums and excesses. Separately, the Government have published a guide that provides advice on how to obtain affordable cover. We recommend that anyone finding it difficult to obtain insurance should talk to a broker and shop around—this was referred to by the noble Lord, Lord Krebs—as this is the best way to make sure that they get the best price for their insurance. There are a range of organisations that can provide help and advice, such as the British Insurance Brokers’ Association and the National Flood Forum. We hope that this reassures noble Lords and that they therefore will be content not to press their amendments. I am happy to write with further details about those people who are seeking to purchase properties.
As the noble Lord said, this creates a duty on bodies that issue demands for council tax,
“in an area designated as liable to flooding to include prominently on or with such demands the information that the relevant property lies within a flood risk area and information on where relevant advice on flood insurance may be found”.
I hope that even though I did not make explicit reference to the noble Lord’s amendment, I have laid out for him where the information is already provided, which is why we do not believe that his explicit reference is required. If the noble Lord looks at what I have said and is not reassured by what I have laid out in terms of addressing the substance of what he seeks, maybe we can have further discussions after Committee.
As I said in my response, we are putting the onus on home owners to seek the information—and I have indicated where that can be acquired—rather than to receive the information, as the noble Lord suggests. I appreciate that this may not be quite as strong as he would wish, but nevertheless there are a number of different sources for this information and a number of ways in which property owners, when they are ceded to Flood Re, will be informed as to their status. If they make a claim they will obviously be informed that that is the case. Therefore there are a number of ways in which they will receive information, even if it is not quite as comprehensive as the noble Lord might wish.
My Lords, I recognise the noble Baroness’s comments in welcoming many of my remarks. She maintains that there is a system in place concerning flood risk data, and I do not for a minute doubt that she is correct about that. While I am reassured, nevertheless I am concerned that people should be able to undertake their own research without the cost of expensive searches. My noble friend Lord Campbell-Savours has further argued that case. I suggest that those expensive searches may well occur further along the process of a purchase. Nevertheless, people these days are very much concerned that they are able to undertake easily, quickly and readily their own research. I will consider further what the noble Baroness said, but meanwhile I beg leave to withdraw the amendment.
Amendment 159 withdrawn.
Amendments 160 and 160ZA not moved.
160A: After Clause 59, insert the following new Clause—
“Flood reinsurance scheme: eligibility
The FR Scheme should be eligible for all houses built and occupied before its introduction.”
My Lords, I said earlier this afternoon that I strongly supported the Flood Re scheme. Again, I thank the Association of British Insurers, individual insurance companies, Defra and Ministers, and congratulate them on their achievement, which is a much needed reform that will give comfort to householders at risk.
However, I want to probe in this amendment the issue of the cut-off date of January 2009 and, in particular, those houses bought before the cut-off at the end of 2008 but not built or occupied until 2009 or after. This amendment uses the date later than 2009, which is simply intended to probe the Government’s intentions. I support a cut-off date—there must be one for the scheme to operate effectively—but the question is whether it must be 1 January 2009 or whether it could be later.
The reason why properties have been excluded from Flood Re from January 2009 is that they were excluded from the 2008 statement of principles. However, I read the Defra briefing, which says that,
“2009 is the most appropriate date based on our current understanding of flood risk”.
Does that imply that the understanding might change because of developments since the statement of principles was established in 2008? This doubt is also important because the proposals in the Bill do not take account of surface water flood risk where information was not publicly available until December 2012, or of changing weather patterns that alter our understanding of what “high risk” is.
The essence of this amendment is: given that houses granted planning permission before 2009 but built afterwards would not covered by Flood Re, there is a case for saying that post-2009 households should be allowed to enter Flood Re where flood risk has genuinely changed since 2009 due to changing weather; where developments are affected by surface water but the risk was not taken into account as it was not understood in 2009; or where contracts had been signed before 2009 but the relevant property was not built until 2009 or later. This amendment tries to address those key questions. I very much look forward to hearing the Minister’s reasoning on this in his reply. I beg to move.
My Lords, we have discussed the substance of Amendment 160B already so I do not propose to move it. However, while I am on my feet, I will comment on Amendment 160A and the terms in which the noble Lord, Lord Shipley, moved it. I received a different narrative on this. The circumstances of the post-2009 cut-off, as explained to me, were that that was the time when Planning Policy Statement 25, in relation to construction on flood risk areas, came into being. As the story went, therefore, everybody was on notice that that was an issue, so that was the cut-off point. However, it occurs to me that the noble Lord, Lord Shipley, has raised rather an interesting issue.
It is fair to say that the end of summer 2008 was when the wheels came off the banking system and, with it, the property development system. If anybody had a planning consent that he was hoping to implement in 2008, he would have found that there was no money or funding to implement it—nothing would be forthcoming. Many of these schemes were put on ice. Indeed, there was a government recommendation—I do not know if you can call it an instruction—to the local planning authorities that they should look favourably on extending the three-year life of these. As I am sure noble Lords are aware, detailed planning consent has a three-year life, so it would have run out and would have had to be reapplied for. Due to the circumstances of having to reapply—maybe there are a new lot of regulations and so on—you can run into a whole raft of cost, time and delay.
The idea was that those things should be perpetuated, and with very good reason. They underpinned balance sheets, loans and all sorts of things. If they were to be effectively prejudiced by the loss of a planning consent, so that you had a property with either no verifiable development value or a lower development value, that had repercussions for precisely the sort of reasons I outlined earlier this afternoon in another context. So it is perfectly possible that a planning consent that was negotiated on the basis of rules in 2006 or 2007 would not have got going by the end of 2008 or 2009, and would have had to be preserved. The houses would not have been constructed until some time later, but the circumstances relating to that consent would have related to the antecedent circumstances at the time of granting of planning consent. I can see that there is an issue here.
I am always a bit frightened by development land values anywhere. I am even more frightened when things go wrong and people start reaching for their lawyers. What are they going to start looking at? Will they say, “The house is now constructed, it was built on what might be called an old technology basis pre-2008, and, lo and behold, it has flooded”? If they are excluded, it may have a material effect on the value. Who will they look to for recompense—the local authority or the fact that Planning Policy Statement 25 did not apply, or should have applied in some other form? This makes me think of the time-honoured American superfund arrangements, where most of the money went not to environmental clean-up but into the pockets of lawyers trying to attach liability. I do not wish to see that sort of thing happening here. Some careful thought has to go into the date and where the cut-off should be. I know it is not easy. I am happy to believe that the account of the reasons and circumstances given by the noble Lord, Lord Shipley, is the correct one, but I am slightly surprised that it seems to be a little at variance with the one that I have. I would be very interested to hear what the Minister has to say about this.
We have had a good debate on this issue, so I will be brief. I am concerned, like others, at the exclusions from Flood Re. My concerns are that many households may have no idea that their property is in a high-risk area or that they are excluded from Flood Re. Like the noble Earl, Lord Lytton, I am interested to hear from the Minister how many properties were built before 2008 but were not occupied until 2009 or after. The people living in these properties may well get a nasty shock when they realise that they are not able to do anything about it.
My concern with Amendment 160A is that all classes of people, whether they are freeholders, leaseholders or the owner of a commonhold tenancy, should be treated equally. Other noble Lords have covered this area in detail. If properties are on the flood plain, whether they are 200 or five years old and whether they are owned or rented, they should be able to access affordable flood insurance. Anything less is invidious. There will be households where a newly married couple have taken on the leasehold of a property, raised their children, lived in it all their working life and now seek to retire there. When they first took up occupancy of the dwelling, there would have been no hint of it ever flooding. However, with changes in the jetstream and continuous and persistent rainfall year on year, they now find that they and their neighbours are suffering from flooding. Are these residents now to be excluded from Flood Re? The Bill is not clear on who the person with the “qualifying interest” is. Will the Minister clarify this situation?
My Lords, I will speak to Amendment 160A. I will be interested to hear the Minister’s response to the question asked by the noble Lord, Lord Shipley, but I shall speak to the amendment as it is written. The Flood Re scheme should be eligible for all houses built and occupied before its introduction.
We live in a blame society. Even now, the media are trying to pin the blame for the current flooding on someone. Is the worst rainfall for 200 or 300 years the fault of the Government, the Environment Agency or local government? It must be somebody’s fault.
With Amendment 160A, we are debating whether houses built after 1 January 2009 should be included in the Flood Re scheme. As was said earlier, PPS25 has made it quite clear that development should not take place in flood risk areas, and yet we all know that it still goes on. One has to ask why. Who is responsible for the houses built on flood risk areas when the rules are quite clear? Everyone is trying to pass the blame on to someone else—“It’s not my fault, guv”. Who is at fault? Is it the Government for not ensuring stricter adherence to PPS25? Is it the Environment Agency? That may be the case. Although 97% of applications that it objects to are refused, it looks at only 6.6% of the 450,000 applications, which is quite clearly not enough.
Is it the fault of local government planners? That is probably the case. One has to ask why they continue to pass applications on flood risk areas contrary to PPS25. Is it the fault of the owner for buying a home built after 1 January 2009 on a flood risk area? It probably is. Caveat emptor, or let the buyer beware: he should have known. If he did not, is it the fault of his conveyance lawyer when carrying out the searches? It raises the question of whether lawyers should be required, as a matter of course, to inform buyers if the house is on a flood risk area and, in this case, when it was built.
One can lay the blame on homes being built on flood-prone areas on any or all of the above but, as sure as eggs are eggs, it is not the fault of the insurance industry. Why should insurers pick up the tab? They have been quite clear on this. Indeed, they are the only ones who have drawn a line by saying that, if a home is built in a flood risk zone after 1 January 2009, under the statement of principles, flood cover will not be available and the property will not be eligible for the Flood Re scheme. Underwriters were quite clear that they did not want to encourage unwise and irresponsible development. Why should underwriters or contributors to the scheme pay for other people’s stupidity? The Government must decide whether PPS25 is to be adhered to or not.
My Lords, there is an element of confusion both outside and inside this House as to where the words which define the exclusion of leaseholders are to be found. I understand that Defra put out a notice in which it excluded leaseholders, but can the Minister tell us where this provision is made? The public are confused. The assumption when anyone reads this Bill that freeholders are included will be interpreted by flat-owners who have purchased their freehold but manage their blocks through leasehold companies—companies which have been established to manage the freehold, owned by the residents who have 999-year leases—to mean that they are also included. They will assume that because they are freeholders they are included. My understanding from my reading, although, as I say, I have not found the authoritative piece of literature, is that they are not included. In other words, people out there who believe they are included—freeholders of blocks of flats; not corporate interests but individual share-of-freehold owners—will think that they are included when they are not. That needs to be sorted out.
I cannot understand why they are excluded. Indeed, I would argue that they are probably less of a risk to insurance companies, even though they may well live in buildings on flood plains, because very often you find blocks of flats where no one is living on the bottom floor at all and the first flat in the block is on the first floor, above the area at risk of being flooded. If I am correct in what I am saying, will the Minister tell us why share-of-freehold owners in blocks of flats are being excluded when, in fact, they are freeholders and when, as I say, people reading the Bill will presume that they are included?
My Lords, I think my noble friend Lord Campbell-Savours is going back to a point that I raised earlier—namely, that the Flood Re parts of the Bill may have been produced relatively late in the Commons. However, the dividing line between what is included in terms of property and what is not is not as clear as it should be. My noble friend has just identified a group for whom this issue is particularly confusing, but in any case the distinction is not in the text of the Bill. As I said earlier, there is slight confusion about the various bits of paper that Defra has produced on this matter, so we need clarity one way or the other as to which groups are included and which are not. We have heard various bits of clarification from the Minister today. I think that most of those should end up in the Bill before we finalise it and I look to the Government to come forward with amendments on Report or at Third Reading to make sure that the position is clear.
I am afraid that I confused the amendment of the noble Lord, Lord Shipley, in this group with an amendment in an earlier group and commented on it earlier. However, whereas I have great sympathy with a lot of the other excluded groups, I have virtually none with those who built on and developed land in high-risk areas after 2009 because it was already clear from the previous agreement between the Government and the ABI that new insurance would not be given for those developments. Like the noble Earl, Lord Cathcart, I do not think we should give those people leeway retrospectively. If we shift the deadline now, somebody will argue for a deadline at a later stage to allow yet more development in inappropriate places, and that will skew the insurance figures and the whole calculation behind Flood Re. Therefore, I do not support the noble Lord on this occasion.
My Lords, my noble friend’s Amendment 160A seeks to make all houses built and occupied before its introduction eligible for Flood Re. This amendment would move the cut-off date for inclusion of properties in the scheme to the start of Flood Re, rather than from 2009, and would also bring band H households in scope of the scheme.
I apologise to noble Lords as I suspect that I may be repeating what I said earlier today and, indeed, we may repeat it yet again later. First, I reiterate why we intend that properties built before 1 January 2009 and those in council tax band H and the equivalents would not be eligible for the scheme. However, before I do that, I shall respond to my noble friend Lord Shipley and a number of other noble Lords who asked what state the property must have been in at 1 January 2009 in order to qualify. It must have been in possession of a council tax band, which would imply that it was habitable at that date. I hope that is helpful.
The 2009 cut-off date recognises that new housing development should be located to avoid flood risk, or where development in a flood risk area is necessary, it should be designed to be safe, appropriately resilient to flooding and not increase flood risk elsewhere, in line with the national planning policies in place. This date therefore reflects the fact that homes built since 2009 should already be insurable at affordable prices. As the noble Lord, Lord Whitty, said, that marker has been in operation for several years, and it has been maintained under the Flood Re proposals.
The noble Lord, Lord Shipley, asked about surface water mapping. The new mapping has shown that the total number of properties affected by surface water flooding is lower than previously thought.
Band H properties are not included in the scheme because, as I explained in some detail earlier today, Flood Re is designed to target support to those who need it most.
The noble Lord, Lord Campbell-Savours, raised the issue of leasehold properties. As we have discussed, commercial policies are out of scope of Flood Re, which is designed to support households. We believe that this approach is fair and practical, and it was supported in the public consultation. However, the leasehold sector presents a more complex situation, where the contents policy is classified as domestic, but a buildings policy could be classified as either commercial or domestic and could cover multiple dwellings. As I said, I recognise the strength of feeling on this issue, particularly in light of the ongoing extreme weather conditions, and I feel we need to take time to consider it in more detail, although, without evidence of market failure, it would be difficult to justify action. However, we will examine the evidence further with the ABI and I hope to provide an update on Report.
If I may, I will include that in that consideration. I hope that my explanations have provided some helpful reassurance. I am happy to ask my officials to work with the ABI to set out the proposed scope of Flood Re in more detail before Report, as that is something noble Lords have asked for. On that basis, I ask my noble friend to withdraw the amendment.
My Lords, I thank the Minister for his helpful reply. A Written Statement would also be helpful as we move towards Report. I should like to pursue two points briefly. I say to the noble Earl, Lord Lytton, that there is more than one narrative but the outcome is the same. The issue is whether the understanding of flood risk that was apparently correct in 2008 and 2009 is still correct in 2014. I suspect that it is not, which is why I am concerned. It would be helpful if the Minister’s note that he will send before Report could inform us whether it is still correct.
The noble Lord, Lord Whitty, said that we should not include in the provision those who had continued to build on high-risk flood plains after 2009. I entirely agree with him, but that was not the point I was making. My point was slightly different—namely, that I think the definition of what is high risk is now changing around us. Therefore, people who bought in good faith properties which were not in a high-risk area may now find that they are living in a high-risk area as a consequence of climate change, changing weather patterns and so on.
We have had an interesting debate. The issues have been identified and we can consider them further prior to Report. Therefore, I beg leave to withdraw the amendment.
Amendment 160B (to Amendment 160A) not moved.
Amendment 160A withdrawn.
Clause 60 agreed.
Clause 61: Register of premises subject to greater flood risk
Amendment 160C not moved.
Clause 61 agreed.
Clauses 62 and 63 agreed.
Amendment 161 not moved.
Clauses 64 to 68 agreed.
House resumed. Committee to begin again not before 8.29 pm.