Flood Reinsurance (Scheme and Scheme Administrator Designation) Regulations 2015
Lord Gardiner of Kimble
That the Grand Committee do consider the Flood Reinsurance (Scheme and Scheme Administrator Designation) Regulations 2015.
Relevant document: 1st Report from the Joint Committee on Statutory Instruments
Lord Gardiner of Kimble (Con)
My Lords, I am pleased to introduce the regulations necessary to implement Flood Re. The increasing sophistication of flood risk modelling employed by insurers, in combination with expected increases in extreme weather events, means that many households in high flood risk areas increasingly struggle to afford insurance. We are seeking to address this: Flood Re will ensure households in high flood risk areas are protected from spiralling insurance premiums and excesses over the next 25 years.
Flood Re is a responsible, proportionate approach to the challenges of flooding, which can be devastating to those affected. However, there are many different aspects to reducing the terrible impacts of flooding on people; Flood Re will form just one piece of the UK’s flood risk management. Many others must play a role in managing flood risk, including householders themselves, local authorities and landowners.
There are two sets of regulations to be debated today—first, the funding and administration regulations, which set out the framework within which Flood Re will operate and how the levy will be calculated. They outline the technical aspects of the scheme. Secondly, the designation regulations, which designate the scheme and administrator and enable the Flood Re scheme to begin operation. These draft regulations were subject to extensive public consultation and were developed by working closely on the detail with specialists from the Association of British Insurers, the Lloyds market and the financial regulators.
It is important that the regulations are debated now in order that Flood Re can sign contracts with individual insurers this autumn in preparation for becoming operational by April 2016. Flood Re will need to be authorised by the Prudential Regulation Authority before it can operate. The financial regulators, and the insurance industry, need certainty about the legislative framework within which Flood Re will work before authorisation as a reinsurer could be given. The financial regulator’s authorisation process is ongoing. We will check with the Prudential Regulation Authority that Flood Re’s application is still being considered as part of that authorisation process before signing the regulations. Although the financial regulators cannot provide a definitive statement on the likelihood of authorisation, this will provide an indication that the application is progressing.
Flood Re will be principally funded by a levy raised from relevant insurers, as defined in these regulations. The amount of each insurer’s levy will be based on its share of the UK home insurance market. The total primary levy to be raised from insurers will be £180 million, which we are assured reflects the level of cross-subsidy currently present in the market. Given the unpredictable nature of flooding and Flood Re’s solvency requirements, we have also provided powers to raise additional levy from insurers if it is needed.
The regulations set out constraints that Flood Re needs to operate within as the levy is expected to be classed as public money by the Office for National Statistics. Flood Re will operate independently as a normal reinsurance company regulated by the financial regulators. Because of its unique position, Flood Re is being set up as a bespoke arm’s-length body.
Flood Re will be directly accountable to Parliament. The regulations stipulate that Flood Re is required to lay its annual accounts before Parliament. Flood Re’s responsible officer will be accountable to Parliament for the financial propriety and regularity of the scheme. While Defra will remain accountable to Parliament for general policy matters relating to flood risk management, there will be no role for Defra’s Ministers or accounting officer in Flood Re’s day-to-day management.
While Flood Re is publicly accountable, it is owned and operated by the insurance industry. Flood Re will be required to manage itself within the normal requirements for regularity, propriety and value for money, and full parliamentary accountability. Flood Re will be audited externally. However, the National Audit Office will also be able to conduct value-for-money reviews of any of its activities, and report on them to Parliament.
The regulations set out that the prices that insurers may pay to cede policies to Flood Re, which we call the premium thresholds, are payable by insurers according to council tax bands. Benefits are targeted at the lower council tax bands and it is hoped that they will be passed to policyholders. The regulations require that Flood Re review the scheme, including the level of the levy and premium thresholds, at least every five years. Any changes to the levy would require amendments to the regulations via the affirmative resolution process. Defra’s Secretary of State may call a review of Flood Re at any point.
Flood Re will publish a transition plan within three months of the regulations coming into force. We expect this plan to indicate how prices may evolve during the life of Flood Re, and the measures that Flood Re may take to incentivise people to do more to manage their own flood risk. However, Flood Re, like all reinsurers, will only be permitted by financial regulation to carry out the business of reinsurance. Flood Re’s directors also have to be able to fulfil their prudential and fiduciary duties according to company law and financial services regulation. UK flood management depends on a complex arrangement of interweaving policies and interested parties, of which the insurance industry and Flood Re form only part.
In conclusion, I remind your Lordships why Flood Re has been established. We all recall the floods which many have experienced in recent years. Flood Re will provide the people of the United Kingdom with available and affordable flood insurance in a way that supports and complements wider efforts to reduce and adapt to flooding. It is expected that between 350,000 and 500,000 households at high risk of flooding will benefit from the Flood Re scheme. Flood Re has made significant progress, appointing its board and senior executive team ready to be considered for designation and authorisation by the financial regulators. These regulations are a significant step in the direction of helping people to manage the impact that flooding can have on their lives. It is for these reasons that I commend these regulations to the Committee.
The Earl of Kinnoull (CB)
My Lords, I apologise for being a minute or so late for that very eloquent introduction. Before welcoming these statutory instruments, I declare my interests as set out in the register, in particular the fact that for several years I was head of the division within the Hiscox group which wrote United Kingdom household insurance and for some years the CEO of the reinsurance company at the centre of the Hiscox group, which wrote many reinsurances of the players in the United Kingdom household insurance market.
These regulations are an excellent example of co-operation between the Government and the industry. It is not the first example, of course. There was one in the early 1990s when, following the two dreadful explosions in the City of London which caused immense damage and in which lives were lost, Pool Re was formed. Pool Re has been a success for the UK insurance market and the UK insurance industry.
It is worth pausing for a moment to consider the UK insurance industry. I am afraid that it is not at the glamour end of the financial services of the City, but it is a very strong industry and in a leadership position in the world. The London and international insurance and reinsurance markets alone account for gross written premiums of around £60 billion a year. The industry employs about 50,000 highly specialist staff, and it is this expertise in insurance and reinsurance which has come together with the Government to structure what is today Flood Re. Will the Minister join me in saying that there is much to congratulate the UK insurance industry on, in its world leadership and its strong, centuries-old reputation for consistently paying valid claims?
Flood Re provides the availability and affordability of flood insurance for flood-prone homes. We have at Hiscox lots of computer systems which can cause artificial floods on a computer screen. You can see just how many homes in recent times have become flood-prone. This is due both to planning policy and to geographical and climate changes. Essentially, the bet has become too big to place with the private insurance market. There are many examples of catastrophe insurance around the world which have become too big for the private markets. Flood Re represents a singularly appealing way of getting around the problem.
As we have heard, the scheme is aimed at 500,000 out of the 25 million or so homes in Britain, so quite a large number of homes are involved in it. On review, I feel that it is simple, secure and sensible. Will the Minister confirm something slightly different in terms of the review process, which is that it is the intention of the Government, particularly in the early years, to review progress of Flood Re and, if necessary, tweak matters to optimise the scheme?
Lord De Mauley (Con)
My Lords, I am grateful to my noble friend the Minister for explaining the regulations. I welcome the fact that the Government are not only putting in place a system that addresses both the availability and affordability of flood insurance—the statement of principles did not do this—but delivering significant levels of investment in flood defences through their historic six-year capital settlement. They are therefore tackling the problem of flooding at both ends, providing homeowners and communities with greater certainty in the years to come.
Protecting people from the emotional and financial hardship caused by flood damage is extremely important. After years of negotiation and with Flood Re now established, we are moving towards making this a reality and protecting people from spiralling insurance premiums. The benefits will be targeted at lower-income households to promote affordability for those least able to pay. Excesses, which can often be in thousands of pounds, will be limited to £250.
The country is investing in flood protection at record levels, with an unprecedented six-year commitment of £2.3 billion following £3.2 billion of spending during the last Parliament. This will see 1,500 flood defence schemes constructed, improve protection for an additional 300,000 homes and reduce overall flood risk by 5%.
Although I have no doubt that the noble Baroness, Lady Jones, will have some questions, because that is her role, I am pleased that the large number of antagonists who faced me from all sorts of angles during the passage of the Bill are, as evidenced by their absence today, apparently satisfied.
Baroness Jones of Whitchurch (Lab)
My Lords, I can see that I am going to have to try to make up for them in one go.
I am grateful to the Minister for setting out so clearly the intention of the regulations. In essence, the schemes as outlined in the Water Act have our broad support. Families living in high-risk flood areas have found their lives blighted both by the flood risk and the worry of unaffordable or unobtainable insurance, so we are pleased that the Government have taken steps to work with the industry to find a solution.
However, your Lordships will not be surprised to hear that I have some remaining concerns. First, there is the timing of the regulations. The Bill was passed early in 2014 and the latest consultation on the detailed proposals took place later that year. It is now October 2015, with another winter imminent. It seems that the expected start date has slipped, with Flood Re now saying that it expects to go live next April. Is the Minister happy with this latest timetable? What does that mean for householders facing another winter of threatened floods in the coming months?
Also, from my reading of the regulations, even if we pass them today, the FR scheme administrator will need to be regulated by the relevant financial regulators, which I think that the noble Lord confirmed. This will take time to set up. Then of course Flood Re is saying that it needs to carry out extensive testing. Can the Minister guarantee that householders will be able to have the additional peace of mind that this scheme aims to offer by the April 2016 deadline? From what he was saying I understood that it was not possible to give that guarantee until the regulators have had time to scrutinise the scheme in detail.
The Earl of Kinnoull
Can I make a point about something that the noble Baroness has just said? This was that modern British insurers might in some way not be using up-to-date flood maps. That is certainly not the case. We have some strict regulators in a pile of quite aggressive rating agencies to make sure that the systems that we use are robust. Our peers are pretty interested, because in the way that the mutualisation of the insurance sector works, if the next-door man goes bust, as, say, the independent insurance company does, others will end up picking up the bill. The noble Baroness’s other points are very interesting, but that point is a weak one.
Baroness Jones of Whitchurch
I am very pleased to hear that, but I noted that some of the evidence I looked through, which was received during the consultation period, raised that as a concern. If we can clarify that there is a standard flood map system I am more than happy to hear that. I am sure it will be of some relief. I am sure that the Minister will also clarify that.
I was talking about who was included and excluded and the designation of domestic properties. The Minister will know that there was some concern, during the course of the Water Bill, about those who were excluded from this provision, in particular the poorest and most vulnerable—those in tenanted and rented properties, which are currently excluded from the scheme. It does not seem right that the same property or adjoining properties could have access to different standards of flood insurance purely on the basis of the status of those who live in the property. Will the Minister clarify whether that is his understanding? Will he also clarify whether farmhouses are to be excluded from the scheme? As he will know, this is of some concern to the National Farmers’ Union. They are, after all, primarily residential properties, even if the farmhouse acts as a business address for the farm. I would be grateful to hear his comments on that.
Finally, we all have sympathy with the householders caught up in the major floods of recent years, but it is important that this scheme does not reinforce complacency in the sector. There is a real risk of increased flooding from the effects of climate change. This scheme needs to be combined with drivers of behaviour change among consumers, businesses and government. The Minister referred to that. It is crucial that future flood management policies take a stronger line against building homes in high-risk areas, while developing sustainable land use plans and restoring flood plains. I hope that the Minister can reassure me that Flood Re will take these responsibilities seriously as part of its brief, and that the Environment Agency will receive sufficient funding to oversee those objectives effectively. I look forward to his response.
Lord Moynihan (Con)
Before my noble friend the Minister responds, I rise as one of the gently scrutinising antagonists in Committee and further stages on the original Bill. We are now reviewing the regulations that derive from it. I really do congratulate the Minister, his predecessor and Defra officials on the remarkable work undertaken on this. I hear what the noble Baroness says about timing, but this is a very short timescale to have made the progress that we have—to move from Royal Assent to today. We should place on record our thanks to all those who worked exceptionally hard to achieve that objective.
I simply want to echo a point the noble Baroness raised. When it comes to the first review it is very important that the scope of application of these regulations and the Flood Re scheme should be fully considered. During our earlier debates there were concerns. The noble Baroness alluded to one, about people living in similar buildings, or, indeed, the same building in different circumstances, being in different receipt of the Flood Re provisions. When it comes to the review we need to assess the impact of that on local communities and on those affected. I hope that the Minister will echo that that will be possible.
Finally, on flood maps, given the important work done by the Environment Agency and the insurance industry on those maps, it is vital that the water companies are also party to those discussions. I understand that government is already actively engaged, for the first time, with water companies on potential contributions to coastal flooding schemes and to the impact of flooding in their designated areas. It is important that the water companies are party to those discussions.
I conclude by thanking the Minister and the team again. I congratulate him on bringing forward these regulations in a timely fashion, and on the work that has been done to ensure that what looks like an outstandingly good scheme is now being implemented—but which will always be, I hope, subject to review and improvement in future.
Lord Gardiner of Kimble
My Lords, as is traditional, I thank all noble Lords for taking part in this debate, but what is perhaps exceptional is that we all wish these regulations success in a very genuine sense because many of your Lordships have been through all the machinations of getting to this point. One of the points that I would like to play back is that I am the Johnny-come-lately in arriving at Defra, and it is very much to the credit of my noble friend Lord De Mauley and all the colleagues who worked with him that we are now where we are. Perhaps I may also acknowledge what the noble Earl, Lord Kinnoull, said about the co-operation and work of the insurance industry. I would like to place on record our thanks to the industry for the hard work and commitment that has gone into progressing Flood Re. Indeed, it is a great example of how the Government and the insurance sector have worked and are still working closely together, in this case to ensure resilience to floods, and in fact making a real and positive difference to many people’s lives. I think it is fair to say that we can all be proud that the UK has in its insurance sector a world-leading brand.
A number of questions have been asked, and it was absolutely right of my noble friend Lord De Mauley to mention flood defences. The Government have been tackling flooding from both ends, and obviously the capital investment has been very considerable, as my noble friend said. We hope and expect these flood works to reduce the risk for more than 300,000 households on top of the 250,000 homes which have already been protected by work undertaken during the last Parliament. It is probably also worth saying that the programme is forecast to reduce the flood risk for up to 420,000 acres of agricultural land, which will avoid more than £1.5 billion-worth of direct economic damage to farmland. Some 205 miles of railway are protected, along with 340 miles of road. With good reason, this is public investment that I hope we will see bearing fruit, and it is very important indeed.
The noble Baroness, Lady Jones of Whitchurch, asked a number of questions, the first of which was about the timing of regulations. It will be a matter for Flood Re itself, once it is authorised by the Prudential Regulation Authority, to determine when it will be in a position to offer cover, but the fund has assured Ministers that April 2016 is a realistic date to become operational. Indeed, when I met the chief executive officer, Brendan McCafferty, only yesterday, I was impressed by the work that has been done and he was similarly of the view that it is an entirely realistic date.
However, this rather plays into what the noble Baroness, Lady Jones, wanted to tease out as well, which is that insurers have agreed to continue to abide by their commitments in the statement of principles, ensuring that householders have access to flood insurance until Flood Re is fully operational. Obviously I take the strictures that the noble Baroness has put to the Government, but I think what my noble friend Lord Moynihan said is relevant. I come to this afresh, and it is clear that an enormous amount of intricate work has had to take place with the insurance sector, the department and with many interested groups. I think that we have made extraordinary progress, given all the complexity.
The noble Baroness also asked about the transition plan. One of the fundamental purposes established in primary legislation for Flood Re is that it is responsible for managing the transition to risk-reflective pricing of flood insurance for households. The transition plan will cover a multi-year period, and it is right and proper that adequate time is given to develop it. But the transition plan will be a public document and Flood Re is accountable to Parliament for it. The plan will be reviewed at least every five years, in line with the review of the levy and the premium thresholds. The noble Earl, Lord Kinnoull, and my noble friend Lord Moynihan asked about the review. As I said in my opening remarks, reviewing as and when necessary will clearly be important. This is a new body and we wish it well but it is important that these matters are kept under review and that there is this accountability to Parliament.
Baroness Jones of Whitchurch
Can I push the Minister a little more on that? If it is of critical importance, as I am sure everyone around the Room would agree, surely it is within the department’s powers to ring-fence the maintenance element of the Environment Agency’s budget. That would be the sensible thing to do, regardless of whether or not a spending review is taking place, to give that security and guarantee.
Lord Gardiner of Kimble
The noble Baroness puts this matter in an extremely tempting way but I am afraid that I am not in a position to talk about ring-fencing today. That is why I emphasised that we all agree that, wherever we can, we would wish to deal with flooding at both ends.
The noble Earl, Lord Kinnoull, helped me enormously on the issue of mapping because the Environment Agency has published a set of national maps so that people can now check for their flood risks from rivers, sea, reservoirs and surface water. Insurance companies have access to the Environment Agency’s mapping but it is of course for each insurer to determine the flood-risk element of the premiums that it charges. Flood Re and the Environment Agency will certainly be working together, so I am confident that in this area we are seeing the sort of co-operation that I think is extremely important and desirable.
On the exclusion of leaseholders and tenants—an entirely legitimate issue to ask about—from the briefings I have had, first, Flood Re is designed to cover only domestic properties. Secondly, policies for landlords who own leasehold properties and some farmhouses will be considered as commercial. The insurance companies will be determining this but we have been assured by the industry—and I hope that this will also be of interest to the noble Baroness—that there is no evidence of a problem with commercial insurance. If evidence did emerge, we would of course consider it.
Another point which may be of interest to the noble Baroness is that contents insurance, which obviously affects everyone including leaseholders and tenants, will be available through Flood Re for tenants of rented properties. However, landlords will not be able to purchase landlord insurance for the building through Flood Re because that comes through the commercial sector of the insurance industry.
Another important point to make, one which was referred to by noble Lords, is that the arrival of Flood Re, as I said in my opening remarks, is not seen as the only tool in the box. It is important that Flood Re should develop plans to incentivise the take-up of resilience measures. As Flood Re’s experience of the market develops over time, the transition plan will include more detail of how the scheme will support the transition towards risk-reflective pricing over its 25-year life. Indeed, Flood Re has a duty to pass on information to insurers about the withdrawal of the subsidy over time, and how householders can access information about their flood risk and then manage it. Insurers have agreed with Flood Re that they will pass that information on to their customers, who will benefit from the Flood Re scheme.
Another issue arises on planning, where I think some advances have been made in terms of much smaller percentages of housebuilding in areas of risk. The National Planning Policy Framework local plans are designed to develop policies to manage flood risk from all sources and seek to use opportunities offered by new development to reduce the causes and impacts of flooding. In terms of where we need to go from here, it is important that planning for new developments is much more conscious than perhaps it was in previous times of this aspect, particularly as we see the effects of potential climate change and all that goes with “adverse weather events”—which I am told is the jargon for what I call bad weather.
I thank all noble Lords and I want to reiterate what was said by my noble friend Lord Moynihan. We are here today because a great deal of work has been done and there has been a lot of good will. It is important that I should place on record my thanks not only to the insurance sector but to everyone involved, in particular the Defra officials who have been dealing with this knotty problem. I am grateful for the opportunity to set out the Government’s approach and I commend the regulations.