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Flood Reinsurance (Amendment) Regulations 2022

Volume 819: debated on Thursday 10 March 2022

Considered in Grand Committee

Moved by

That the Grand Committee do consider the Flood Reinsurance (Amendment) Regulations 2022.

Relevant document: 29th Report from the Secondary Legislation Scrutiny Committee

My Lords, the instrument before us was laid before the House on 27 January. It makes important changes to the Flood Re scheme, a joint government and industry scheme launched in 2016 designed to improve the availability and affordability of UK household flood insurance.

In 2019, the scheme administrator, Flood Re, published its first quinquennial review. This is a statutory requirement. Flood Re made several recommendations to the Government. A number of proposals have since been assessed and consulted on, leading to the changes set out in this instrument.

To date, Flood Re has helped more than 350,000 households at high risk of flooding across the UK to access affordable insurance. Before Flood Re, just 9% of policyholders with a prior flood claim could obtain flood insurance quotes from two or more insurers, and none could get quotes from five or more. Following the scheme’s launch in 2016, the availability of flood insurance policies for those with prior flood claims has increased. Around 96% of customers can now get five or more quotes, and four out of five householders with a prior flood claim have seen price reductions of more than 50% since the scheme’s launch.

Building on this success, the statutory instrument makes technical changes to the scheme to improve its efficiency and effectiveness and changes to drive the uptake of property flood resilience measures, helping the UK to become more resilient to the changing climate. I will outline these measures in turn.

The statutory instrument designates a revised scheme, as described in the new scheme document dated 19 January 2022. The scheme document provides the framework for Flood Re to administer the scheme. First, the new scheme document will allow Flood Re to propose a revision to levy 1 every three years instead of every five, and reflects the Government’s assurance process. Levy 1 is the scheme’s primary income, raised from UK household insurers based on their market share. The revised levy amount will be subject to parliamentary approval every three years. This change will allow Flood Re to obtain better value for money when purchasing reinsurance and be more dynamic in response to the potentially changing risk profile. The instrument amends the figure for levy 1 from £180 million to £135 million per year for the next three years. This will ensure that the total levy is no higher than it needs to be.

Secondly, the new scheme document will allow Flood Re to set the liability limit— this sets the maximum amount of claims that Flood Re is liable to pay to insurers in any one financial year—every three years instead of every five. This will align it with the levy-setting cycle and afford Flood Re greater flexibility to respond to the scheme’s changing income needs and risk profile.

Thirdly, the new scheme document also makes a technical clarification that levy 1 funds will be returned to the Government when the scheme ends, in line with the established agreement between the Government and Flood Re.

I now turn to the change that will help drive the uptake of property flood resilience in UK households. We have seen only recently the devastation that can be caused by flooding and the impact on the lives and health of those households that are affected. Property flood resilience gives homes and businesses the tools to manage the impact that flooding has on their property and their lives, enabling them to respond and recover more quickly if flooding happens.

The new scheme document will allow Flood Re to pay claims from insurers ceding to the scheme, which include an amount of resilient repair up to a value of £10,000 above the cost of like-for-like reinstatement of actual flood damage. This will allow UK householders to build back better after a flood, making their homes more resilient to possible future flooding by using products such as air brick covers, flood doors, water-resistant kitchens and plasterboard. Resilient repair will enable homeowners to return to their homes quicker and reduce the cost of any future claims.

Build back better is being introduced on a voluntary basis. Insurance companies who cede to the scheme can choose whether to offer build back better to their customers. Participating insurers will be able to start offering build back better soon after the regulations come into force. Flood Re, the scheme administrator, will require insurers choosing to participate in build back better to offer it across their home insurance offerings rather than just on insurance policies ceded to Flood Re, thus ensuring consistency and fairness for all customers.

By providing Flood Re with the power to pay claims to fund resilient repair over and above normal reinstatement, the Government and Flood Re aim to drive a cultural shift across the insurance market, driving positive changes in supply chains, raising awareness and demand for property flood resilience, and helping to capture the evidence on the benefits of property flood resilience to support future changes in the market.

The Government will publish a property flood resilience road map at the end of this year, identifying the action that government and industry need to take to accelerate the take-up of property flood resilience measures and successfully underpin the market. This will ensure that all relevant bodies play their part and that consumers can have assurance about the quality of products and their installation. The road map will consider whether any changes to build back better are required to strengthen and improve it. Any future regulations brought forward making further changes to the Flood Re scheme would receive parliamentary scrutiny through the affirmative procedure, as required by the Water Act 2014.

Flood risk management policy is devolved. However, insurance policy, including the operation and application of the Flood Re scheme, is a reserved policy. Any changes to the scheme, including those in this instrument, take effect across the UK. The Government have engaged extensively with the devolved Administrations throughout the development of these changes; they support their implementation. No impact assessment has been prepared for this instrument because it has no significant impact on business, charities or voluntary bodies. Most impacts on business are anticipated to be either neutral or positive. There is also no impact on the public sector.

I commend these regulations to the Committee.

My Lords, I thank the Minister for his introduction to this statutory instrument, which seems fairly straightforward. However, I have a number of questions to ask him, if he is able to answer.

The Flood Re scheme was set up as part of the Water Bill in 2014 after the horrific flooding we witnessed during that winter. It was to ensure that, for those properties whose owners would find it almost impossible to gain flood insurance cover on the open market, the owners would not be left with no redress. The fund was to be paid for by a levy on all insurance companies, so spreading the load. The figure at that time was £180 million, as the Minister said; as a result of this statutory instrument, the figure is being reduced to £135 million.

The Adaptation Sub-Committee of the Climate Change Committee, chaired by the noble Baroness, Lady Brown of Cambridge, anticipates that flooding is likely to increase rather than decrease. In that case, how can the Government be sure that reducing the Flood Re fund by £45 million will not have a negative impact on those who cannot get insurance on the open market? Surely the fund should be monitored at the very least, or increase in anticipation of future demands on it.

The Explanatory Memorandum is clear that these regulations designate a new FR scheme. Given that the existing flood reinsurance scheme is working well, why is it necessary to have a new one? Apart from the difference in the sum involved, in what way will the new scheme be different from the existing FR scheme?

Paragraph 7.4 of the Explanatory Memorandum states that the liability limit will be reviewed

“every three years instead of every five.”

That is fine. The liability limit was £2.1 billion in 2016, with increases in line with the consumer prices index. Can the Minister say what the liability limit is currently, in 2022? It is important to review the limit but it has to be done in conjunction with the risk profile, as identified by climate change professionals, not just what Defra officials think might happen.

Paragraph 7.5 of the EM states that the surplus funds on the wind-up of the existing scheme will return to the Government. Can the Minister say why this surplus is not being transferred into the new scheme? This seems to me to be a mistake. If the insurance companies are paying a levy towards Flood Re, surely they should be the ones to reap the benefit of any surplus in the existing fund. Paragraph 12.3 refers to the lack of an impact assessment, as there is a negligible impact on businesses. If the surplus in the existing fund were transferred back to the insurers, it would have no impact at all on business. The Government are attempting to have their cake and eat it.

The new scheme will allow insurers on a voluntary basis to make payments of up to £10,000 for resilience repair—build back better—over and above the cost of like-for-like reinstatement of actual flood damage. My recollection is that this resilience repair element was part of the original commitment of Flood Re. Can the Minister say whether this was ever implemented from the start? If not, why not? Resilience is a vital element of this scheme.

I cannot see any reason why a new fund has to be set up if the existing one is operating well and has surplus funds in it. I am sorry to say that I feel something of a sleight of hand is going on here; at best, there is a distinct lack of transparency. Given the view of the Adaptation Sub-Committee of the Climate Change Committee that the incidence of flooding is likely to increase in future, I feel the reduction in the levy pot by £45 million is premature. Can the Minister reassure us that, for those who have access to the Flood Re fund, it will be there when they need it?

My Lords, I thank the Minister for his helpful introduction to this SI and the Secondary Legislation Scrutiny Committee for drawing it to our attention. I had a strong sense of déjà vu when reading it, as I was present when the first SI was debated back in 2015, which clearly illustrates that I have been in the job too long. I remember our original debates and will come back to some of the issues raised then.

Since then, the UK has suffered more regular and devastating extreme weather events, as the noble Baroness has said, with the result that thousands of properties are being flooded, many on a repeat basis. This has underlined the need for more robust and accessible home insurance. It is good to hear that Flood Re has been judged a success and that it has helped thousands of homeowners in flood risk areas who would otherwise have struggled to insure their homes, as the Minister was saying. It was also reassuring to hear that the scheme has met its initial liquidity and capital requirements and has a high solvency ratio, making it financially secure. On this basis, we accept that it makes sense to reduce the levy on insurance companies from £180 million to £135 million a year.

However, a number of questions arise from the proposals, which I would be grateful if the Minister could address. First, the Explanatory Memorandum referred to the statutory quinquennial review of the FR scheme and the recommendations that arose from it. Have all the recommendations of that review been agreed by government and put forward in this amended proposal today, or are there other recommendations still out there or under consideration or which have been rejected by the Government?

Secondly, as we have heard, one of the recommendations before us today is the build back better proposal to allow claims up to the value of £10,000 to enable homeowners to fund flood-resilient improvements over and above any like-for-like repairs. This is a welcome initiative, but paragraph 12.3 makes it clear that the participation of insurers in the build back better supplement will be voluntary. Why was it not made compulsory for all insurers to offer this payment, given the urgent need to make our properties more resilient to flood risk in future? Do we have any information about the appetite of insurers to pay this extra supplement? The Minister quoted some statistics, but I would be grateful if he could confirm what proportion of insurers are providing the build back better facility.

Thirdly, I return to some of the concerns raised when the original scheme was introduced which still seem relevant today. Are the poorest and most vulnerable—those in tenanted and rented properties—still excluded from the scheme? It really does not seem right that people living in the same or adjoining properties could have access to different standards of flood insurance purely on the basis of the status of those living in the property. Do you still have to be the homeowner to qualify? Since the scheme now appears to be financially secure, what consideration was given to extending access to it to wider categories of claimants, such as tenants?

Can the Minister clarify the current status of farmhouses? I know that this has been a concern for the farming community. Most people would say that they are primarily residential properties, even if they also act as a business address. Can farmhouses join the Flood Re scheme?

Finally, could the Minister clarify whether we are still focusing on properties deemed in high-risk flood areas? Given the recognised threat of extreme weather events arising from climate change—the noble Baroness talked about the issues raised by the Adaptation Sub-Committee on this—how can we be sure that the right areas are now being designated as high-risk flood areas? Has not our experience of flood risk in recent years been that it is increasingly hard to define? Does the Environment Agency have the resources to reassess and redesignate flood risk areas from low to high risk with sufficient speed to ensure that insurers can respond accordingly? What further powers are the Government proposing to give to the Environment Agency to ensure that no further properties are built in high-risk flood areas against its advice, as can happen at the moment?

These are all issues that need to be addressed if Flood Re is to achieve its true potential. I hope the Minister can address them. I look forward to his response.

I thank noble Lords who have contributed to the debate. I will address the questions put to me.

As has been noted, the levy will reduce from £180 million to £135 million per year for the next three years. That is based on an assessment that £135 million is what is needed. The view is that we do not want to set the levy higher than it needs to be because it is effectively a form of tax.

I note the arguments put forward by the noble Baronesses, Lady Bakewell and Lady Jones, that everything suggests that flood risk is increasing and that volatile weather patterns are likely to become more so, but the scheme is not designed to be the UK’s answer to flood risk; it is a part of the answer. There is a whole bunch of other policies designed to make the UK more resilient in the face of increasingly volatile weather. For example, a major component of the environmental land management subsidy system is about better land management to create more resilience. Our tree strategy, the peat strategy and so on are all different components of it. There is the grey infrastructure component of the work Defra is doing as well. This is just part of the much wider approach the UK is taking.

The scheme is financially secure. Flood Re has met its initial liquidity and capital requirements and has a high solvency ratio. The Government have undertaken the necessary due diligence to assure themselves that Flood Re has enough funds to cover any losses as a result of a major flood event. The Government Actuary’s Department agrees that £135 million is suitable and well within the risk appetite of Flood Re.

The noble Baroness, Lady Bakewell, asked about the liability limit. Flood Re has set the liability limit at £1.9 billion from 1 April 2022 for the following three years. This is a non-statutory change already approved by the Secretary of State for the Environment, aligned with the Government’s assurance process.

Build back better will play a key role in helping to increase the resilience of UK households to flooding. We hope that it will drive a cultural shift across the insurance market, driving positive changes in supply chains, raising awareness and demand for property flood resilience, and helping to capture the evidence on the benefits of property flood resilience to support future changes in the market.

Research by Defra and Flood Re has demonstrated that the additional investment for flood resilience over standard repair can be as high as £35,000, but averages to around £5,200. However, the Government recognise that the cost of making different properties resilient may still exceed the contribution from build back better. Insurers and/or the householders can choose to pay for build back better above the £10,000 cap if that is what they want to do.

The noble Baroness, Lady Jones, asked whether the scheme is open to farm buildings. It is open to them but not to outbuildings—the precise definition of which I am unable to offer her now but I will do so if she asks me to follow up in writing.

Build back better is being introduced on a voluntary basis, as I have said. The reason why it is not a mandatory scheme is that we calculate it is very much in the interests of the insurance companies to buy into it, if additional flood resilience measures have a knock-on effect in terms of the costs they are likely to bear going forward. Insurance companies that cede to the scheme can choose whether to offer build back better to their customers, but I am encouraged to hear that insurers representing a big proportion of the home insurance market have already applied to participate. While the noble Baroness was talking, I tried to find exactly how many have signed up, but I am afraid that I do not have the figures so will come back to her. However, I am assured that it is a significant proportion of the market.

Property flood resilience is a nascent market. At this early stage, we want insurers to adopt build back better, embed it into their processes and encourage innovation and learning by doing. Flood Re will work with insurance companies to capture and contribute data and insight to assist the development of an evidence base on the impact of the policy and property flood resilience. Flood Re will encourage insurers to meet best practice when implementing build back better and will set out its expectations in the scheme’s treaty and underwriting guide. This will include recommending assessment surveys and that proposals for measures and installations are underpinned by the property flood resilience code of practice, and highlighting the training opportunities available and the BSI standards and kitemarks for insurers to use.

The Government will publish a road map by the end of 2022 to further accelerate take-up of property flood resilience measures. This will ensure all relevant bodies are playing their part and that consumers can have assurance about the quality of products and their installation. The Government have the option of tightening the regulations in the future, should that be necessary, following the publication of the PFR road map, which will identify the action required by government and industry to successfully underpin the property flood resilience market.

These changes will come into force on 1 April 2022, subject to the will of Parliament. Build back better will be a business decision by insurance companies. It will be for insurance companies that cede policies to the scheme to opt into build back better and to choose how best to offer it to their customers. The Government expect participating insurers to begin offering build back better to their customers soon after these regulations come into force.

I hope that I have covered the questions put to me. The scheme is necessary; it helps improve the efficiency and effectiveness of the Flood Re schemes and builds a nation more resilient to climate change. I hope that I have reassured noble Lords on their questions.

Before the Minister sits down, one question that I do not think he addressed was about high-risk flood areas. At the moment, you can access the scheme only if you live in a high-risk flood area. Obviously, that is a moveable feast these days because of extreme weather events, so it would not necessarily be the traditional areas that get flooded. There could be flash flooding in many parts of the country for all sorts of reasons. How often does the Environment Agency update that information and allow new properties to come onstream to be insured under the scheme? If we are not careful, it could become outdated very quickly and not be available to all those categories of homes that need it.

The noble Baroness makes an important point. I am told that the Environment Agency will reissue a map of flood risk some time in 2024. As she says, even that new map will need to be continuously updated. One hopes that those areas at high risk today will not necessarily be at high risk in the years to come if the measures that we invest in now are carried out appropriately and if our rationale and assumptions are correct.

Motion agreed.