With only a few days before the 30 June expiry of the so-called ‘statement of principles’, which helps ensure that home owners in flood-prone areas can still insure their properties, there is little outward sign of progress in finding a replacement.
In the short term, the statement of principles has been extended while intensive discussions between the Association of British Insurers (ABI) and the Government continue.
Recent severe flooding in central Europe costing insurers several billion pounds and a Met Office view that the UK can expect another cool, wet summer, helps ensure that the issue of flooding is never far from the headlines.
Simon Douglas, director of AA Insurance, says that notwithstanding the discussions he hopes that the Government’s spending review on Wednesday 26 June will see further commitment on flood defence investment.
“Insurers are taking a cautious view of progress of the government discussions and believe that the statement of principles may need to be extended further – possibly by up to six months.
“But even if a solution is reached tomorrow, there will need to be a transitional period while legislation is put in place, all of which takes time.
“My view is that the ABI’s ‘Flood Re’ proposal is the best way forward although it is likely to be adapted to reduce the Treasury requirement to underwrite whatever agreement is drawn up, possibly through the reinsurance industry.
“Even so, it will rely on all home owners being willing to fund the potential flood costs of others. This would be reflected in the premiums they pay – possibly by around £10 per policy.
“However, it is worth pointing out that many homes that were flooded last year had no previous history of flooding – so no-one is immune from that threat.”
Mr Douglas points out that the UK’s home insurance policies are unique in Europe in that they automatically include flood cover. Elsewhere this is bought separately and in part or wholly underwritten by the government, so in the event of major flooding, an emergency relief fund is released that is paid for through the tax system.
For example, in the recent German flooding only 20% of properties (including commercial property) had any flood insurance* yet home owners can expect the Government to meet the bulk of the cost of reparations.
“The German system has merit because not only does it depend on all taxpayers to help meet the cost, but the government has a direct interest in taking steps to reduce flood events to keep the costs down.
“For the UK, a privately-led insurance solution to build a flood reserve to meet future major claims is probably the best way forward.
“But I do believe the government will need to underwrite the final outcome to a certain extent at least during the early years. That would be vital if there is a major flood disaster soon after the system is launched as the insurance reserve would be insufficient to meet the cost. I believe that uncertainty is a major concern for ministers.”
“There’s no doubt that the best form of protection is flood defences. The past two years have seen new flood defences more than pay for themselves in terms of protecting homes, businesses, infrastructure and the local economy. Each successful flood defence represents a significant reduction in the costs that would otherwise have to be met not just by insurers, but the Government, local authorities and – ultimately – those home owners and businesses affected.”
Mr Douglas says that if the talks stall again then that is seriously bad news for flood-prone families who will find it impossible to insure or sell their homes.
“The country is watching and waiting.”
Written by Ian Crowder, 01256 492 844 , ian.crowder@theAA.com
