Flood Insurance

Andrew Smith Excerpts

Tuesday 26th March 2013 Commons Chamber

[Mr Raab]

I thank my hon. Friend for his timely intervention and I think that he is on point. We need a comprehensive deal covering all aspects of the insurance premium.

[Mr Andrew Smith (Oxford East) (Lab)]

Will the hon. Gentleman give way?

[Mr Raab]

I will not, because I need to make progress and, under the strictures of Mr Deputy Speaker, I will need to give way later.

The “Flood Re” insurance scheme would create a non-profit fund to ensure that cover is available for the 2% of homes that are at significant risk of flooding. Like the current system, the model would be based on cross-subsidisation. High-risk home owners would pay higher premiums, subject to a cap, and benefit from a subsidy levied on lower risk properties. Today that subsidy costs the average property owner about £8 a year—that is the proportion of the insurance premium that they pay. Under “Flood Re” that would rise by an estimated £1. Those owning a band A property at significant risk of flooding would see a 15% increase in their premium, rising to 43% for more expensive homes. The point of the scheme, therefore, is to cushion the most vulnerable. In return, the insurance industry wants the Government to strengthen flood defences, provide access to flood risk assessments and enforce planning regulation on floodplains more rigorously.

The parameters of a balanced deal are emerging. Ministers have, understandably, refused to sign any blank cheques, including for bankrolling “Flood Re” or for providing a temporary overdraft facility underwritten by the taxpayer. That would be difficult to justify at any time, but especially with our public finances under such acute strain.

[Mr Smith]

I am grateful to the hon. Gentleman for giving way. I strongly support the motion and congratulate him on securing the debate. Is it not important to bear it in mind that the insurance companies do not have a completely free hand in this, because they are required by state regulators to secure reinsurance on the risk that they take on? Unless there is some Government participation to cap that risk, it will be impossible to get it at an affordable price and the disaster that our constituents are threatened with will happen.

[Mr Raab]

I thank the right hon. Gentleman for his intervention. He has touched on some of the technical aspects, to which I am sure the Under-Secretary of State for Environment, Food and Rural Affairs, my hon. Friend the Member for Newbury (Richard Benyon), will respond. It is clear that the state needs to be involved in this. This cannot be left solely to a free market. Even a free-market MP like me would accept that.

It would be useful if Ministers could today explain their position on the gist of the “Flood Re” proposal, and any concerns they have now that the taxpayer is not being asked to underwrite the overdraft facility. One key issue is the balance of contributions by those owning properties at higher risk and ordinary insurance holders. Have Ministers considered the composition of the board of governors of the fund, and in particular the number and character of members who are independent of both the Government and the industry? How will the Government retain control and accountability over future increases in either the levy or ordinary premiums? Both aspects are important; it is a question of balance.

The “Flood Re” scheme inevitably invites comparison with models used elsewhere. In the United States, the national flood insurance programme is not funded on the basis of cross-subsidisation, but as a result was left $17 billion in the red after Hurricane Katrina. “Flood Re” as a model would avoid a situation in which the British taxpayer covers all losses the market will not insure—the Dutch Government have such a commitment. The “Flood Re” model is somewhere between the US and Dutch models.

Alternative models have been proposed but are not in the negotiating mix between the ABI and the Government at this stage. One alternative presented by Marsh, the insurance broker, would involve mutualisation of 50% of flood claims among all home owners. That would pass back to home owners or the Government the risk of paying the remaining 50% of flood claims. What view have Ministers taken on that alternative?

More broadly, the negotiations on flood insurance shed broader light on the UK’s wider environmental policy. The risks of flooding, which is effectively what we are debating, prompt a simple question: have we got our environmental priorities right? Met Office data show that four of the five wettest years on record have occurred since 2000. The Government’s chief scientist has warned that

“in quite a short time scale…we are going to have more floods, we are going to have more sea surges and we are going to have more storms”.

Strengthening flood defences should therefore be a top priority—both in its own right as a matter of sound policy, but also to contain the rising insurance premiums that have prompted today’s debate—and yet environmental resilience has been relatively low down the pecking order of UK environmental policy for more than a decade. By way of illustration, the cost to businesses and consumers of the inefficient green subsidies to solar and onshore wind through the renewables obligation will be £2.6 billion this financial year. That is almost as much as DEFRA will spend on flooding and coastal defences over the entire five-year period of this Parliament. Those are skewed priorities. The Government ought to place greater emphasis on adapting to the reality of climate change—the environmental here and now—and spend less time speculating on technological winners that hike energy bills, particularly for the squeezed middle, without substantially decarbonising the UK economy.

That points to a more systemic, bureaucratic problem, namely the lack of policy coherence between the Department of Energy and Climate Change and DEFRA since they were separated in 2008 by the previous Government. Too often, DEFRA feels like DECC’s more realistic but poorer cousin, and yet DEFRA is left to pick up the pieces when an environmental crisis strikes. Have Ministers considered re-merging the two Departments? That would integrate policy and realise at least £1 billion from cutting bureaucracy, which could be used to invest in flood defences as well as to pay off the deficit more quickly.

The state has a role to play in managing acute and severe risks such as flooding. We need the Government to provide the right framework to meet UK energy demands, especially through nuclear power and shale gas; to invest in flood and coastal defences; and to strike the right deal with industry, and soon, to protect small businesses and vulnerable homes from soaring insurance premiums. I commend the motion to the House.

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[Nicola Blackwood]

I agree that infrastructure is vital. I believe deeply that many of the problems we face today stem from an inherited legacy of bad planning.

[Mr Andrew Smith]

rose—

[Nicola Blackwood]

My right hon. Friend—ish—the right hon. Member for Oxford East (Mr Smith) knows how difficult it can be to get accountability and solutions for constituents when responsibility falls between the Environment Agency, local authorities and Thames Water, and he might want to comment on that point.

[Mr Smith]

I am grateful to my hon. Friend-ish for giving way.

Flood waters are no respecters of constituency boundaries and we work closely on these issues. On planning, does the hon. Lady agree that, given that successive Governments and councils of all complexions have allowed so much development on the floodplain, it is perfectly proper for the state to pick up some of the responsibility by participating in insurance schemes, such as “Flood Re”, which are the only way to protect our constituents from unaffordable premiums?

[Nicola Blackwood]

Clearly, it is vital that flood insurance continues to be widely available and affordable, a point I will come to in a moment. Although there is frustration about the responsibility of different agencies working together to respond to constituents, the emergency response to flood events locally since 2007 has improved dramatically, and there have been positive developments on flood defences in Kidlington and Oxford.

However, none of that addresses the long-term strategic challenges we face, and insurance has to be at the top of that list. That is why, with all the other urgent flooding priorities that we have heard about, we have to focus on the 30 June deadline. That date dominates the lives of far too many of my constituents. They fear that they will suddenly become uninsurable, breach their mortgage conditions and have unsellable properties. While I appreciate that negotiations with the Association of British Insurers have been complex and that there is no easy solution, especially with the current fiscal situation, it is not as if we did not see this coming—it has been coming since the statement of principles was agreed in 2002.

If we are not going to hit the deadline, we need to be clear and transparent with constituents about what will happen between then and any future deal. Until now, the line has been not to undermine negotiations by giving a running commentary on them. That is not unreasonable and had an agreement been reached in time, I think that all would have been forgiven, but people need to know now how to protect themselves. Ministers have been clear about their priorities, which are to ensure that flood insurance remains widely available, affordable and fiscally sustainable. Nobody is going to argue with any of those principles, but they will not help householders to work out how to plan for their financial future.

I therefore ask the Minister the following questions. On the stroke of midnight on 30 June, will we have a free market or will we have some kind of interim extension of the statement of principles? If it is the latter, have there been any discussions about what form it will take? If the Government are going to let the free market emerge in the interim, will Ministers let it be genuinely uncontrolled, with all the pricing risks that holds, or are they considering regulation? If so, what kind of regulation, and how and when? On “Flood Re”, the current cross-subsidy is £8. Yesterday the ABI told me that the proposed levy would also come to £8, but it would have to be formalised as a tax. However, the National Flood Forum brief estimates the levy at £13. What assessment have the Government made of the levy and what mechanism would they need to regulate it? Finally, what measures are being considered to incentivise flood defence investment on a personal, local and national level? That is the only responsible way to manage flood risk on an ongoing basis.

I accept that it takes two to tango. I met the ABI yesterday and I made those points, but I am afraid that today it is the Minister’s turn. My constituents deserve to know whether their homes will be insured in July and on what terms. They deserve at least that measure of certainty, even though they live in a flood-risk zone.

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[Julian Sturdy]

I entirely agree with my hon. Friend. Local flood groups are very important for our communities. I am sure that, like my community flood group, my hon. Friend’s is working hard with the Environment Agency, the local authority and the local water and drainage boards to improve flood resistance capabilities.

Some ideas that have been considered include allowing local residents to have control over mobile pumping units and sandbag storage and delivery and to use their local knowledge to protect the most vulnerable people. We must not forget that there are some severely vulnerable people in flood-risk areas, and we must make sure that they do not become isolated by flooding. Independently, many people are considering making flood resilience improvements to their own homes.

The hard work, positive action and sense of resolve that I have witnessed in Naburn is extraordinary, and the community should be commended for its collective approach to the problems that it faces. I am well aware that, as has been pointed out, there are similar stories across the country of communities coming together to battle the difficulties of flooding, and they should all be commended.

[Mr Andrew Smith]

I, too, praise the Oxford Flood Alliance. Insurance is one aspect being pursued there. The alliance has found that just because one person in one property gets a quote from an insurance company their neighbour may not be able to get anything like a similar quote from the same company, because the companies limit their exposure in these areas. That is driving up premiums and giving people intolerable uncertainty.

[Julian Sturdy]

I entirely agree with the right hon. Gentleman, and I have been told of similar circumstances in relation to the accessibility of local flood insurance.

What my constituents fear, as I do, is that their efforts, which I have just explained, could all be in vain if the statement of principles ends without a new agreement in place. Home insurance premiums would sky-rocket for all residents in communities such as Naburn, regardless of whether or not a property is susceptible to flooding. Some people would lose flood insurance altogether, and, as has been said, mortgage agreements could be at risk as a result. I understand the need for negotiations between the Government and the ABI to be private and confidential, but the lack of any specific details emerging from the negotiations is fuelling my constituents’ concerns about how they will cope in the future.

My constituents are prepared to come together to work as a community to face up to the flooding threat on their doorstep. They therefore need the same commitment from the Government and the insurance industry to do all that they can to protect people from the worst excesses of flooding and deliver an agreement that improves the availability and affordability of flooding insurance where flood resilience measures fail. It is time for action.

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[Neil Parish]

I thank my hon. Friend for correcting me about that being a not-for-profit scheme, but that was not the point I was making.

My point is that when we levy all insurance payers to build up a fund that takes the risk of properties in high-risk areas away from the insurance companies, we should not be too generous because insurance companies are all about taking risk. That is what they are in business for. They should therefore be able to take their fair share of risk. I want to ensure that the insurance companies step up to the plate, but also that the Government help those who, in their areas, cannot get flood insurance under a private scheme on the free market. That is the balance that must be struck.

[Mr Andrew Smith]

Does the hon. Gentleman agree that there is a precedent for the Government’s participating in the way that we are all advocating in the “Pool Re” arrangements that provide terrorism insurance cover?

[Neil Parish]

I agree with the right hon. Gentleman that the Government can step up to the plate and be the insurer of last resort. However, the point I am making is that the Government must be the insurer of last resort, not the insurer of first resort.

Because there has been so much flooding in the past year, the insurance companies have naturally been putting the maximum possible pressure on the Government. They are in business, so it is right for them to do so. However, given that everybody who pays insurance across the piece will pay for the scheme, the Government must ensure that everybody is dealt with fairly.

It is essential that people who genuinely cannot get insurance—those who have been flooded two or three times, such as my constituents in Feniton—can get insurance in the future. The current statement of principles does not cover them. I am therefore looking forward to the Government putting in place a much better system so that people can access insurance irrespective of whether they have been flooded several times. It is not their fault that they live in a property that is flooding; in many respects, it is planning decisions that generate floods.

In the village of Feniton, there have been appeal decisions allowing more houses to be built where the appeal inspector has actually recognised in his brief that the village will flood and might flood further as a result of the development, but has allowed the houses anyway because the district council has not got its five-year housing plan up to speed. That means that the poor people down the bottom of Feniton will get flooded even more. What is the logic of that? This must be not only about flood insurance but about a planning policy that says we do not build on floodplains or on hills above villages so that the water runs off and floods the people at the bottom end of the village even more. This is something I get quite excited about, because the people who get flooded should not have to put up with it.

Other hon. Members have talked about ensuring that the money for the Bellwin scheme is available when, for example, roads are washed away by floods. Very often, the Government claim that Bellwin is available to local authorities, but when the latter claim it, the Government and the bureaucracy decide that many of the proposed schemes to cover flood damage are not eligible. That has to be dealt with.

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[Richard Benyon]

I am really short of time, but I will respond to the point that I believe the hon. Gentleman wants to make. If I have time to give way at the end, I will do so.

As Ministers have repeatedly made clear, the main aim of our work has always been to reach an agreement whereby insurance bills remain affordable, without placing unacceptable and unsustainable costs on wider policyholders. The Government have been doing a lot to support the continued availability of affordable insurance. Reducing flood risk will always be the best and most sustainable solution. Despite difficult times, we are on track to spend more than £2.3 billion to deliver better protection from flooding and coastal erosion to more than 165,000 homes over the four years to 2015. Our new system of partnership funding has brought in an additional £148 million on top of that from external partners. Many hon. Members, including the hon. Member for Wansbeck (Ian Lavery), have benefited from that in their constituencies. I give full praise to him and his constituents for the leadership that they have shown.

The hon. Member for Kingston upon Hull North (Diana Johnson) asked why there was nothing in the Budget, but £120 million of investment was announced in the autumn statement. Many of those schemes are shovel-ready and proceeding, and they are a great comfort to constituents.

Despite last year being the second wettest on record, more than 200,000 homes were protected from flooding because of defences already in place. The Environment Agency’s flood warning service provided additional support; evidence is emerging that many houses avoid flooding because of the better flood warning system. We have estimated that, for every property that suffered flooding last year and in January, more than 25 homes were protected because of flood defences and maintenance work and because of the work of the Environment Agency, local authorities and other front-line responders. More than 200,000 householders are therefore benefiting from the Government’s continued investment in managing flood risk.

Many hon. Members are impatient for information on the Government’s discussions. I am impatient to share the details, but it would be quite wrong to go into too much detail.

I join my hon. Friend the Member for South East Cornwall (Sheryll Murray) in offering commiserations to her constituent and her family for their loss. I entirely agree with her that all available information must be made publicly available, so that we can get to the bottom of what precisely happened.

[Mr Andrew Smith]

Will the Minister give way?

[Richard Benyon]

If I can, I will try to give way in a moment.

We have recently announced a flood resilience community pathfinder scheme for Cornwall and a number of other parts of the country. In my hon. Friend’s case, £476,000 will be spent in Cornwall.

The hon. Member for Luton South (Gavin Shuker) said that the statement of principles was universal insurance.

[Richard Benyon]

Perhaps that is not what the hon. Gentleman said. The statement of principles is not universal —not by a long chalk—which is part of the problem. Everything he said in his quote from the Prime Minister is absolutely right, and I thank him for pointing it out.

When Conservatives were in opposition in 2008, it was agreed that a successor to the statement of principles would be required. The previous Government agreed that a market could emerge after the end of the agreement. The statement of principles says that there will be no need for specific agreements after June 2013. All hon. Members disagree with that and believe that we need a follow-up.

My hon. Friend the Member for Esher and Walton, to whom I want to give time to make a winding-up speech, asked about the Government’s view of a flood mutual, which is an important question. We are looking very closely at the proposal, which is a possible alternative to “Flood Re”. We are working closely with those who are making that proposal.

[Mr Andrew Smith]

Will the Minister give way?

[Richard Benyon]

The right hon. Gentleman will have to be very brief.

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[Mr Smith]

The Minister said earlier that he was impatient to share information with the House. Can he tell us what the Government’s sticking point—their fundamental problem—is with the “Flood Re” proposal?

[Richard Benyon]

I will come on to that.

My hon. Friend the Member for Cardiff North (Jonathan Evans) talked about flood insurance in the context of terrorism, but those are entirely different types of insurance. The pool model does work for some of them, but the “Flood Re” model would not work in this case, because it does not provide support for the cost of that cover. He made the point that “Flood Re” is a not-for-profit solution. Well, yes and no, in that the Government would pay through a levy—so householders are paying for it with an element of underwriting—but taking away risk from the most at risk is an advantage to the industry. So we must be very careful. The Minister’s job is to look after the taxpayer and householder. Yes, we need a solution, but not at any price. Whoever was standing at the Dispatch Box, they would not want to bring before the House a deal that was unworkable or that would cause the wrong sort of increases for some of the most at risk and hard up of our constituents. We need to get this right.

My hon. Friend the Member for Portsmouth North (Penny Mordaunt) made a point about farmland and the wider risk. When farmland is flooded as part of a formal flood alleviation scheme, the landowner is compensated.

My hon. Friend the Member for Esher and Walton introduced the debate with a powerful speech. He made a point about the governance of any arrangements. He was right to do so, and it is important that we take forward his concerns and make those arrangements clear in the announcement. I can assure him that the Department for Communities and Local Government and the Department for Environment, Food and Rural Affairs are working closely.

I was concerned that the hon. Member for West Lancashire (Rosie Cooper) talked about shambolic local flood administration in her constituency. We have implemented the Flood and Water Management Act 2010, which arose from Sir Michael Pitt’s recommendations after 2007. I note that she said that that is not happening in her constituency, and I am happy to take that up.

Many hon. Members made good points, which I could probably summarise as, “We want a decision and an announcement soon, because our constituents are worried.” I can understand that. We are doing other things to help those who might be struggling to find affordable insurance. We have published a guide to obtaining flood insurance in high flood risk areas in collaboration with the National Flood Forum, Which? and insurance industry representatives. The guide helps people navigate through the insurance market and acts as a signpost to actions that individuals can take to reduce their flood risk.

Insurance can be found for reasonable prices if people talk to their insurer about their specific circumstances. The Environment Agency can provide supporting evidence on the local flood risk, for free, which people can use in discussions, and I want to hear from hon. Members if that is not happening. Different companies take different approaches to flood risk and it almost always pays to shop around.

I recognise the great concern on both sides of the House on this matter. I want to give hon. Members and their constituents the assurance that they want, but I will not do it at any price. Yes, it has taken longer than any of us would have wished, but I hope that the deal we bring to the House will be better than what we have now, especially for those of our constituents who are on low incomes.