Flood Insurance for Businesses
(8 years, 9 months ago)
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Craig Whittaker (Calder Valley) (Con)
The floods that hit the north of England over the Christmas period brought untold misery and suffering to a record number of people. In the Calder Valley, 2,700 homes and 1,635 businesses were flooded. In addition, four schools were affected, two of which are likely to remain closed for the foreseeable future, several bridges were destroyed and the total repair bill for damaged infrastructure currently stands at £32 million.
The Government’s response so far has been most welcome. A £12 million package for households and businesses was made available within days of the flooding to help with the initial incidental costs. Since then, we have seen £5.5 million for the rebuilding of Elland bridge and, most recently, funding to repair and improve flood defences in the village of Mytholmroyd, which was particularly badly affected.
As welcome as the Government response has been to date, there is still far more to do. The communities in my constituency will need a great deal of support over the coming months and years as they get back on their feet.
The Environment Agency is due to complete the long-awaited flood prevention modelling work for the length of the Calder Valley in October. Although improved flood defences and upland management schemes cannot guarantee full protection in the future, there is an urgent need to move ahead with such projects. In addition to flood prevention work and the cost of repairing the damaged infrastructure, there is also the need to work with businesses to ensure that they are able to recover. An essential part of that is ensuring that small businesses are able to access flood insurance.
In response to a recent written question on this issue, the Under-Secretary of State for Environment, Food and Rural Affairs, the hon. Member for Penrith and The Border (Rory Stewart) said:
“While we recognise the difficult challenges that some small businesses could face in accessing commercial flood insurance in areas of high flood risk, we are not currently aware of evidence that there is a systemic problem. Therefore, we have committed to work with the Association of British Insurers (ABI) and other interested parties to monitor the insurance market for small businesses. We are keen to work across government, and with a range of business interests, to better understand the nature and extent of any problem that might exist”.
Alex Cunningham (Stockton North) (Lab)
I am grateful to my former Education Committee comrade for securing this debate and for giving way. This afternoon, I met Alan Smith, the leader of Allerdale council, to hear of the problems in his area and his worries for small and large businesses. Of concern is the fact that excesses of several tens of thousands of pounds are needed in order to secure insurance. What specific role should the Government have in developing some form of Flood Re type scheme for businesses, perhaps with some of that underwriting money that we have for domestic issues?
Craig Whittaker
I will come on to what I want the Government to do a little later, but I will also explain what is currently taking place. The hon. Gentleman is absolutely right that the excesses for small and medium-sized businesses are phenomenally unaffordable, as are some of the premiums on offer.
In addition to the written question that I mentioned earlier, the Prime Minister recently stated that he was looking very carefully at this issue and that, although some small businesses are highlighting concerns, the insurance companies, via the Association of British Insurers, state that they would not turn down any small business for flood insurance.
Jim Shannon (Strangford) (DUP)
Flooding has become worryingly regular across the whole of the United Kingdom of Great Britain and Northern Ireland. Mother Nature cannot be ignored. Does the hon. Gentleman agree that we should consider setting up a formal structure of permanent support for businesses that are affected by flooding, outside of the insurance industry?
Craig Whittaker
I am not sure that that is the sole responsibility of the Government. I think that there needs to be a joint approach between the insurance industry and Government, but, again, I will come on to that during my speech.
Although the ABI said that it would not turn down any small business for flood insurance, I can tell Members that, having spoken to hundreds of businesses in the Calder Valley over the past few weeks, it has become apparent that many small businesses are experiencing difficulties in accessing flood insurance and that this uncertainty, coupled with the crippling costs that now face some businesses as a consequence of the floods, is jeopardising their future. Although I note the Minister’s response that the Government are not aware of any evidence of a systemic problem, I question the basis on which that conclusion has been reached.
Last July, the Department for Environment, Food and Rural Affairs published the report “Affordability and Availability of Flood Insurance: Findings from Research with Businesses”. A cursory look at the report might lead one to conclude that there is not a problem after all. The research found that uptake of insurance across businesses is high. The survey showed that the vast majority of small businesses arrange commercial insurance cover for their premises and that there is no significant difference between small businesses that are located in high flood-risk areas and those that are not.
However, a more detailed consideration of the report, particularly the basis on which the evidence has been collected, provides a different picture. The headline figures from the report come from a secondary source, a small business survey run by the Department for Business, Innovation and Skills. The DEFRA report acknowledges that the BIS survey data contain only small numbers of businesses located in high flood-risk areas. As such, one may legitimately question how valuable such data are when considering the issue of insurance for businesses in high-risk areas. The main focus of the DEFRA report was a series of in-depth interviews with businesses, and it is that component that forms the main evidence base. Only 25 businesses were interviewed, the majority of which were not in high flood-risk areas. The overwhelming majority were very small businesses, employing fewer than 10 people, and only one manufacturing business was included in the sample. My point is that the evidence base of the DEFRA report is not particularly credible and, as a consequence, the report is of limited value. If they are to appreciate the extent of this issue the Government and the Association of British Insurers need to speak to businesses in areas of high risk.
John Mc Nally (Falkirk) (SNP)
As the recently appointed chair of the all-party parliamentary group on flood prevention, I can tell the hon. Gentleman that we had discussions with the hon. Member for York Central (Rachael Maskell) on this on, I think, 26 January. It became apparent in the debate, which was interrupted several times so that we could vote in the Chamber, that there was a great divide on whether there was evidence to show that businesses had been affected. Does he agree that the APPG should visit the sites so that we can witness the problem and speak to the businesses that have been affected by flooding?
Craig Whittaker
Of course, we would always welcome the APPG in the Calder Valley. In fact, we welcome anyone who would like to come and have a look. Indeed, if it helps us to make progress in this area and others affected by flooding, the whole group is very welcome, and I will help to arrange for businesses to talk to it too.
To appreciate the true extent of the problem, the Government and the ABI need to speak to businesses in areas of high risk, including those located in communities that have experienced a high frequency of flooding in recent times such as the Calder Valley. Calderdale Council says that between 40% and 50% of businesses cannot access flood insurance in five of my six communities, while our local insurance broker in the upper Calder Valley tells me that 20% of his clients cannot access flood insurance—ironically, including himself. True to the spirit of people in the Calder Valley, he has a desk and a mobile phone set up in the middle of all the building works in what was his office, working to ensure that his clients are sorted out. After the floods he, along with other brokers from around the UK in high flood-risk areas, were invited to London to highlight cases to the ABI. The journey turned out to be an absolute farce, as the ABI refused to look at those cases, saying that it was not allowed to do so because of data protection. The ABI says that there is no evidence of businesses not being able to access flood insurance, and cites DEFRA’s own report, which I have highlighted, to say that there is no evidence.
Rachael Maskell (York Central) (Lab/Co-op)
Today, I received a briefing from the ABI saying that it was not going to look at the issue of small businesses having a Flood Re scheme, and that small businesses could shop around for insurance. I know from my constituency of York Central that that simply does not happen, and is not possible. Businesses in my constituency are putting forward their own resources instead of claiming from their insurance company. Is it not crucial that the Government move forward with a Flood Re scheme for small businesses to make sure that they are protected in future?
Craig Whittaker
I am not quite sure that that is entirely the Government’s responsibility. The ABI has a huge responsibility for this too. As I shall highlight with the things that have been done in the Calder Valley—doubtless they have been done in York Central too—it is the responsibility of business, but it is also everyone’s responsibility to make sure that we have viable businesses, otherwise we do not have communities going forward.
Stuart Blair Donaldson (West Aberdeenshire and Kincardine) (SNP)
I apologise to the hon. Member for Calder Valley (Craig Whittaker) and to you, Mr Deputy Speaker, for arriving late. The hon. Gentleman has made an important point about the ABI. Does he agree that another way to help businesses and communities affected by flooding is for the Government to apply to the EU solidarity fund to ensure that more support is available for those businesses and communities?
Craig Whittaker
As the hon. Gentleman knows, the Government have given a commitment to look at that funding to see how they can help. I dare say the Minister will give us an update on that.
Of the many businesses across the Calder Valley which are experiencing these difficulties, I will cite just three of the many examples coming in daily to illustrate some of the concerns that I have become aware of. I will not name the companies as we do not want their customers to lose faith any more than they have already. The first is a leading high-end British furniture manufacturer located in Mytholmroyd which is experiencing difficulties similar to those faced by other businesses. It is a very successful manufacturer of sofas, employing some 100 local people. On Boxing day, it was flooded for the second time in just four years. After the last flood it could get insurance only for stock, not for machinery or anything else relating to flooding. It is facing a loss of around £500,000. The business will survive and continue, but of significant concern is the insurance position going forward. Its insurance cover was due for renewal only last week and it has been told that it will not be able to access flood cover again, even for stock.
At the other end of the Calder Valley, located in Brighouse, is a nationally acclaimed climbing centre which opened in 2011 and now has over 30,000 members. Together with its sister business, a bar and a restaurant, it employees 30 local people and occupies a strategic site that is central to the regeneration of the wider area. As the business is located between the river and the canal, it has been unable to access any flood insurance since it was set up. The business incurred losses when it was flooded in 2012 and now, following the latest floods, it faces a very substantial bill and a battle to stay in business. Once again, the business is in limbo.
Last but by no means least, I will mention a large manufacturing firm which has been flooded on four separate occasions over the past decade. The business has been able to access flood insurance in the past, but has been told in no uncertain terms by its insurers that it will not receive flood cover in the future. Its inquiries of other insurers have been unsuccessful on account of the ridiculous terms and conditions that have been quoted. The difficulties in accessing insurance, and the losses incurred by being flooded so regularly, now mean that it is likely that this business will close, with the loss of 40 jobs.
Holly Lynch (Halifax) (Lab)
Does the hon. Gentleman agree that bigger and smaller businesses alike may be significant employers for neighbouring constituencies, and the thought of flooding just once is so serious that they may think of moving out of the Calder Valley? The loss of those jobs, and the loss of the business rates those businesses pay and the support that they provide to communities, is serious. Business insurance is a big part of ensuring that we are an attractive place in which to keep trading.
Craig Whittaker
The hon. Lady is right. As she knows, the Calder Valley is made up of high-sided valleys, so there are few places for those businesses to relocate locally. If they move out of the Calder Valley, we will lose the job skill sets and the local communities will wither and die. I shall return to that.
Although I am encouraged by the words of the Prime Minister and his assurances that he is looking very closely at this issue, my experience leads me to believe that there are potentially hundreds of businesses in my constituency which are unable to access flood insurance. The examples I mentioned are the tip of the iceberg and serve only to illustrate the difficulties that some businesses are experiencing because of the lack of adequate cover. If this situation is replicated nationally in communities susceptible to flooding, which I imagine is the case, this means that thousands of businesses across the UK are experiencing these difficulties.
Every community that is susceptible to flooding has its unique challenges and this is certainly the case in the Calder Valley. Towns in my constituency such as Todmorden, Walsden, Hebden Bridge and Mytholmroyd, Elland and Brighouse are located next to the River Calder at the bottom of steep-sided valleys. They are proud communities and their small businesses and independent traders are the lifeblood and the beating heart of our area. The topography of those areas is very challenging and the transport links are limited. This means that there is limited land for development, as I said to the hon. Member for Halifax (Holly Lynch), so locating to another premises in the area is not a viable option for many businesses. This underlines the serious economic challenge that communities such as the Calder Valley face. If these businesses close down or move away from the area, we are in grave danger of losing the vast employable skills and expertise built up over generations, and our local communities are in grave danger of withering on the vine and dying. The importance of this issue, then, cannot be overstated.
With Flood Re, which is for domestic properties, the Government have shown that it is possible to work with the insurance industry to create a scheme that can fill the gaps in the existing market. They are currently talking with the Association of British Insurers about business insurance. The ABI feels that it is the Government’s responsibility to fix this issue, while the Government, I am sure, feel it is for the market to fix it. However, I suspect the solution is somewhere in the middle—
Craig Whittaker
I suspect the solution is somewhere in the middle, with a joint partnership between both.
Melanie Onn (Great Grimsby) (Lab)
Does the hon. Gentleman agree that a strategy to provide upfront support for businesses, protecting their properties from flooding in the first place, would bring down insurance premiums, save the Government money on repair funding and save businesses lost revenue in the long run?
Craig Whittaker
The record shows, particularly in the Calder valley, which was flooded in 2012, that the Government invested quite a lot of money in flood prevention schemes, allowing people to invest in their homes. One problem we have, of course, is that although people live beside the rivers, they do not particularly prepare for these things. The evidence does not really show that putting flood prevention in reduces the risk with insurance companies. That is one of the serious issues that needs addressing.
Meanwhile, while the big boys talk some more, the businesses in Hebden Bridge are looking at a scheme called Watermark, which will give customers the choice of paying the normal price or the Watermark price for goods. On top of that, businesses will have the choice to pay into a generic pot as well—almost a savings plan. Although they accept that the pot will not cover all the damage done if and when the floods hit again, it will give them access to a pot that will allow some of their uninsured works to be done. That is something the ABI and some of its members perhaps need to start looking at, thinking out of their box and perhaps accessing some of their moral and social justice conscience.
To be fair, some insurers I have seen have done excellent work with their clients; in fact, they have behaved incredibly well. They include companies such as Aviva, which has pledged that the claims of their current small and medium-sized enterprise customers will continue to get cover and that those with excesses of more than £350 will not see those excesses rise when they next renew. Unfortunately, that is only for existing customers.
The British Insurance Brokers Association is in the process of creating a scheme for SMEs that will specifically include businesses at risk of flooding. BIBA’s expectation is that it will enhance the current situation by enabling up to 2,000 BIBA brokers across the UK to place those more difficult risks through the scheme, offering cover to the vast majority of businesses that have struggled in the past. My understanding is that BIBA is in advanced negotiations and that it aims to launch the scheme this year. However, I have spoken with BIBA, and the scheme uses only products that are already on the market. It also seems to be quite a complex system of protection for the carrier and protection for the property that is to be insured, with a further policy to reduce high excesses. How will the scheme assist businesses with the excessive terms and conditions that act as a barrier to insurance already? Will it help to reduce some of the unreasonable levels of excess that make cover unaffordable in many cases?
May I request that, in communities such as the Calder valley, the Government work alongside small businesses to identify the gaps in the market and to understand what prevents some businesses from receiving adequate flood cover? Relying on the DEFRA report is just not good enough; the evidence is not there, and we need to go out there and get it.
It remains to be seen whether BIBA’s new scheme is the innovative solution the market requires. However, I do know how desperate businesses are in my constituency and in those of other hon. Members—those constituencies have probably not suffered quite as badly, but these things are pretty grim for anyone who is in this position. These businesses are relying on a long-term solution being found. I sincerely hope that the Government are able to identify the gaps in the market, to better understand the nature and extent of the problem and to work with the insurance industry to develop a new facility to address these issues.
The Parliamentary Under-Secretary of State for Environment, Food and Rural Affairs (Rory Stewart)
I pay tribute to my hon. Friend the Member for Calder Valley (Craig Whittaker) for a very quiet but very forensic speech that showed the deep care that he has for his constituency. I saw that directly myself when I walked through many of the businesses that he described. I saw how, in essence, a tidal wave had moved through a furniture factory, wiping out half a million pounds-worth of stock. I saw how a furniture warehouse was ruined and a community centre had been wiped out. I saw, as many hon. Members on both sides of the House have noted, the incredible impact that this has had on a very precious and beautiful area of our country and a historic community, and how intimately the subject of business insurance is connected to the livelihood and the longevity of these communities.
I will not get into a detailed discussion about the DEFRA survey, although I would point out that it is not quite as bad as it seems on paper. A total of 2,686 businesses were surveyed, but I absolutely agree with my hon. Friend that the 25 on whom an in-depth survey was conducted was not a large enough number to be a decent sample. I strongly encourage the hon. Member for Falkirk (John Mc Nally) and his APPG to get involved in the detailed investigation of what is happening in business insurance in Calder Valley. The hon. Member for Stockton North (Alex Cunningham) raised that issue powerfully.
There are improvements that we can already make without looking at a flood re scheme. First, we need to make information far more accurate so that businesses in a flood-vulnerable zone are not being punished when they are not actually flooded. Secondly, as has been pointed out, we need to make sure that businesses are more resilient. We have access to good public information about that. There is a very good example of a business in Cockermouth that took the right measures and, as a result, was able to come back from the flooding in two days whereas previously it took four months.
In relation to business, the Government have a part to play in investment and infrastructure. We need to guarantee broadband connections; there was a problem in that regard at Tadcaster bridge. Electricity substations and roads must be left open, because that matters not just for communities but for businesses. We need to acknowledge that the insurance industry cannot be the complete answer. As the hon. Member for West Aberdeenshire and Kincardine (Stuart Blair Donaldson) pointed out, it is important that there is an element of grant coming in. We have put a great deal of grant behind businesses—an average of £2,500 per business, but in some cases considerably more—because we acknowledge that the insurance industry does not produce all the answers. There is also the capital expenditure that we need to put into flood schemes in general.
My hon. Friend the Member for Calder Valley focused, as did the hon. Member for York Central (Rachael Maskell), specifically on whether there should be a Flood Re scheme. I am afraid that time will not allow me to answer this question in detail, but I will give some points to consider in looking at business insurance. First, setting up one of these schemes involves a very considerable cost to the dry. At the moment, within a Flood Re scheme, regardless of where someone is located—they could be on the edge of a river and flood every three years—they would be guaranteed that for a £250 premium, or the basic rate of council tax on a £250 excess, they would be insured. This would mean that businesses in dry areas would have to cover the cost of providing insurance in some of the cases that my hon. Friend raised. For example, if a business has indeed, as he said, flooded twice in four years at a cost of £500,000 to its stock each time, it will be difficult to provide insurance without some measure of cross-subsidy for businesses that are not in flood-affected areas.
The second problem is the complexity of flood insurance for businesses. It is much more straightforward for householders, who basically look to insure their buildings and contents. A business, on the other hand, has to look at how much cash it has in the bank, and how much it therefore wants to lower its premiums and self-insure against a higher excess. It has to look at whether it has high fixed structural assets and whether it wants to insure them. An internet company will not want to invest much in insuring the building that it is in, whereas for a farm, a property business or a restaurant, that fixed structural asset is absolutely essential to the continuity of its business.
The difference can be huge when it comes to business interruption insurance. For example, business interruption would be minimal for a company such as cheapflights.com, provided that its service was not located in the area affected. However, if the McVities biscuit factory in Carlisle were wiped out by a flood, the business interruption consequences would be catastrophic. That is why it is much more difficult to model business insurance than household insurance.
There is also, of course, the issue of moral hazard. We do not want to encourage businesses to locate themselves in flood-vulnerable zones if they have a high fixed structural asset cost. We want to keep those communities vibrant and alive, but we also want to do so in a way that makes sense.
Nevertheless, something must be done. The hon. Member for Halifax (Holly Lynch) has emphasised the importance of business insurance for retaining the communities for the sake of their history and the social costs involved. We therefore need to answer some questions. First, how much subsidy—because there will have to be an element of subsidy—do we wish to put into an individual valley? Secondly, as the hon. Member for Strangford (Jim Shannon) has asked, what should the balance be between the Government element of the subsidy and that provided by the insurance industry for businesses in non-flood-affected areas?
Thirdly, should we consider a different insurance model? One possibility—we have not done this in flood insurance before—is to consider the approach taken by travel and medical insurance, which have a fixed indemnity. If the Government are to be involved, it might be reassuring for them to know that a property had a fixed indemnity of £20,000 or £50,000 attached to it, rather than what we have at the moment, which is an unlimited flood insurance liability.
That is why I am delighted to say that tomorrow I will host a round table with BIBA, ABI, the Federation of Small Businesses and a dozen other stakeholders, to talk through the concrete, detailed issues involved in providing serious insurance for businesses.
John Mc Nally
I have sent the Minister a letter inviting him to the next meeting of the all-party group on flood prevention, but he has not replied. It would be an opportune time for him to meet us after his other meeting.
Rory Stewart
I would be delighted to do that. I have 45 seconds left. I pay tribute to a wonderful speech by my hon. Friend the Member for Calder Valley. It was a serious forensic analysis that tore the DEFRA report to pieces, for which I am grateful and I will follow up on it. I also thank the other Members who have contributed to the debate, and I pay tribute to the extraordinary community in Calder Valley, including the community activists in Hebden Bridge, individual businesses and, indeed, the military on the streets for the work they did. Finally, I give a commitment to my hon. Friend and to the House that we will, through the round table and over the weeks ahead, look in full, relentlessly and vigorously, at the costs, both economic and social, involved in failing to provide adequate business insurance.
Question put and agreed to.