So the Water Bill is back in the House of Lords this week – but there is a growing sense of desperation around Flood Re, the proposed new agreement between Government and insurers on affordable flood insurance which is included in the Bill. Recent reports suggest that there may not be a firm agreement on this until 2016 – another year on from the original date – which is all the more frustrating amid the current extensive flooding in Somerset and Kent.
There has been a constant stream of possible stumbling blocks reported in the press (we’ve written about some of these in previous blogs). The latest is to do with the exclusion of leasehold and housing association properties as well as the private rented sector, because strictly speaking these need commercial rather than residential buildings insurance. The proposed agreement as it currently stands would also exclude houses built after 2009 and properties in council tax band H.
This represents many millions of homes which will not be covered by the scheme and therefore may not in future be able to obtain flood insurance.
A plea to reconsider the proposals
The Council of Mortgage Lenders has made a very valid point: that it’s difficult to believe the original intent was to exclude a swathe of residential property. A spokesman has been quoted as saying: “Given that this appears to be an unintended consequence, we strongly urge legislators and the insurance industry to reconsider the proposals and ensure flood cover remains available on homes as people would expect.”
No wonder the final date seems to be receding before our very eyes.
The recent serious flooding in many parts of the country has triggered demands to bring forward Flood Re, the proposed new agreement between the Government and insurers on affordable flood insurance. This isn’t due to come into force until the summer of 2015.
There have been reports in the press of the anger felt by homeowners in flood-hit areas over the uncertainty for the future of flood insurance. This was particularly highlighted by a confrontation between a resident of a waterlogged Yalding in Kent and the Prime Minister.
This confrontation prompted responses from both the Government and insurers, who say they have no intention of speeding up the process to finalise the agreement. There is still a long way to go. A spokesperson for the Association of British Insurers was quoted as saying: “What we’ve now got is a framework that the Government agrees is the only way forward but we shouldn’t underestimate the work that needs to be done to meet the deadline.”
A tortuous path to agreement
We’ve been following closely the tortuous path towards the implementation of Flood Re. This is included in the Water Bill, which is currently going through Parliament and won’t pass its last legislative hurdle until summer 2015 (see our recent blog on this). If the past few years are anything to go by, then we are likely to see significant instances of flooding across the country during this time, which could make final agreement even more difficult to reach.
The insurers are sticking to their commitment to provide insurance to existing customers under the terms of the old Statement of Principles, which expired some time ago. But the future of affordable flood insurance for those in high-risk areas is still uncertain.
We’ve been writing for a long time about the struggle to find a new agreement between the Government and insurers over affordable flood insurance. Our most recent blogs have been about Flood Re, the proposed solution which will cap premiums and link them to council tax bands.
The latest milestone in this becoming law was reached recently with the second reading of the Water Bill in the House of Commons. And it seems that, despite some lingering dissent over various aspects of the scheme, there is no viable alternative. The bill has now gone on to the next stage: this week, it has started to be examined by Parliament’s Public Bill Committee.
Areas of contention
The main area of contention remains affordability, particularly around excesses which are likely to be capped at £500, and there is still uncertainty about high-value properties and whether small businesses will be covered. In addition, agreement is needed over when the Government would step in to deal with catastrophic flooding. There’s a great summary of all of this in an insurance industry blog.
But, as this makes clear, Flood Re is really the only show in town and, to quote it, “Whatever arguments lie ahead, we have taken a big step towards a resolution to the challenge of providing affordable insurance for (almost) everybody”.
There’s been another interesting response to the proposed Flood Re scheme, which has been drawn up by the Government and insurers to ensure affordable flood insurance for homes across the UK (you can read about this in an earlier blog). This time it comes from the All Party Parliamentary Group on Insurance and Financial Services (APPG), and they’ve made some very interesting points.
According to a report in Post magazine, they’ve firstly called for residential homes which are used as commercial premises to be covered under the scheme. At the moment commercial premises are excluded, but the Group is calling for clarity on whether some types of small businesses are included, especially when residential and business accommodation are mixed within the same property.
The APPG have also called for homes in band H, the top council tax band, to be included: currently, the proposed scheme would exclude these properties. They’ve been quoted as saying: “Nothing should be considered uninsurable under the Flood Re scheme”.
Warnings of a “dangerous spiral”
But the Group sounded a warning: the introduction of the flood obligation could cause insurers to withdraw from insuring properties, which would place a greater burden on other insurers who might then also withdraw, and this could lead to a “dangerous spiral”.
As we keep saying, there is still a long way to go….
It seems that the new Flood Re proposal is facing difficulties already – and it’s only a few weeks since it was first mooted.
We wrote in July about the Government’s last-minute breakthrough with insurers when facing the expiry of the current agreement on flood insurance. This comprised a plan to introduce a charge on all home insurance policies in return for continuing cover for homes in danger of flooding. The new system is intended to help up to 500,000 householders in flood-risk areas who would otherwise face much higher – and potentially unaffordable – insurance premiums.
But there has been a succession of reports from various organisations in the weeks following the announcement which have highlighted significant potential difficulties. These include one by the London School of Economics which, according to The Guardian, suggests that the new scheme underestimates the impact climate change will have on the number of properties at risk. A further report covered by The Independent by the Centre of Climate Change Economics and Policy and the Grantham Research Institute makes the same point.
However, another from the Department for Environment and Rural Affairs – in other words, from the Government itself – has, according to The Telegraph, found that the costs of the scheme are likely to outweigh the benefits and would “very likely be classified by the Office for National Statistics as a tax”. In addition, under European Union laws, the levy is also “likely to be deemed to constitute ‘state aid’, which is banned because it interferes with free market competition”.
And then there’s the problem of small businesses: these were included in the original agreement but at the moment would not be covered by Flood Re. This is highlighted by the British Insurance Brokers Association (BIBA) in its response, along with other pertinent points over the workability of the proposal.
So there is still a long way to go. I’m sure we’ll be revisiting this subject rather a lot over the next few months and years…