Flood Reinsurance (Amendment) Regulations 2022

Baroness Bakewell of Hardington Mandeville Excerpts

Thursday 10th March 2022 Grand Committee

[Baroness Bakewell of Hardington Mandeville (LD)]

My Lords, I thank the Minister for his introduction to this statutory instrument, which seems fairly straightforward. However, I have a number of questions to ask him, if he is able to answer.

The Flood Re scheme was set up as part of the Water Bill in 2014 after the horrific flooding we witnessed during that winter. It was to ensure that, for those properties whose owners would find it almost impossible to gain flood insurance cover on the open market, the owners would not be left with no redress. The fund was to be paid for by a levy on all insurance companies, so spreading the load. The figure at that time was £180 million, as the Minister said; as a result of this statutory instrument, the figure is being reduced to £135 million.

The Adaptation Sub-Committee of the Climate Change Committee, chaired by the noble Baroness, Lady Brown of Cambridge, anticipates that flooding is likely to increase rather than decrease. In that case, how can the Government be sure that reducing the Flood Re fund by £45 million will not have a negative impact on those who cannot get insurance on the open market? Surely the fund should be monitored at the very least, or increase in anticipation of future demands on it.

The Explanatory Memorandum is clear that these regulations designate a new FR scheme. Given that the existing flood reinsurance scheme is working well, why is it necessary to have a new one? Apart from the difference in the sum involved, in what way will the new scheme be different from the existing FR scheme?

Paragraph 7.4 of the Explanatory Memorandum states that the liability limit will be reviewed

“every three years instead of every five.”

That is fine. The liability limit was £2.1 billion in 2016, with increases in line with the consumer prices index. Can the Minister say what the liability limit is currently, in 2022? It is important to review the limit but it has to be done in conjunction with the risk profile, as identified by climate change professionals, not just what Defra officials think might happen.

Paragraph 7.5 of the EM states that the surplus funds on the wind-up of the existing scheme will return to the Government. Can the Minister say why this surplus is not being transferred into the new scheme? This seems to me to be a mistake. If the insurance companies are paying a levy towards Flood Re, surely they should be the ones to reap the benefit of any surplus in the existing fund. Paragraph 12.3 refers to the lack of an impact assessment, as there is a negligible impact on businesses. If the surplus in the existing fund were transferred back to the insurers, it would have no impact at all on business. The Government are attempting to have their cake and eat it.

The new scheme will allow insurers on a voluntary basis to make payments of up to £10,000 for resilience repair—build back better—over and above the cost of like-for-like reinstatement of actual flood damage. My recollection is that this resilience repair element was part of the original commitment of Flood Re. Can the Minister say whether this was ever implemented from the start? If not, why not? Resilience is a vital element of this scheme.

I cannot see any reason why a new fund has to be set up if the existing one is operating well and has surplus funds in it. I am sorry to say that I feel something of a sleight of hand is going on here; at best, there is a distinct lack of transparency. Given the view of the Adaptation Sub-Committee of the Climate Change Committee that the incidence of flooding is likely to increase in future, I feel the reduction in the levy pot by £45 million is premature. Can the Minister reassure us that, for those who have access to the Flood Re fund, it will be there when they need it?

[Baroness Jones of Whitchurch (Lab)]

My Lords, I thank the Minister for his helpful introduction to this SI and the Secondary Legislation Scrutiny Committee for drawing it to our attention. I had a strong sense of déjà vu when reading it, as I was present when the first SI was debated back in 2015, which clearly illustrates that I have been in the job too long. I remember our original debates and will come back to some of the issues raised then.

Since then, the UK has suffered more regular and devastating extreme weather events, as the noble Baroness has said, with the result that thousands of properties are being flooded, many on a repeat basis. This has underlined the need for more robust and accessible home insurance. It is good to hear that Flood Re has been judged a success and that it has helped thousands of homeowners in flood risk areas who would otherwise have struggled to insure their homes, as the Minister was saying. It was also reassuring to hear that the scheme has met its initial liquidity and capital requirements and has a high solvency ratio, making it financially secure. On this basis, we accept that it makes sense to reduce the levy on insurance companies from £180 million to £135 million a year.

However, a number of questions arise from the proposals, which I would be grateful if the Minister could address. First, the Explanatory Memorandum referred to the statutory quinquennial review of the FR scheme and the recommendations that arose from it. Have all the recommendations of that review been agreed by government and put forward in this amended proposal today, or are there other recommendations still out there or under consideration or which have been rejected by the Government?

Secondly, as we have heard, one of the recommendations before us today is the build back better proposal to allow claims up to the value of £10,000 to enable homeowners to fund flood-resilient improvements over and above any like-for-like repairs. This is a welcome initiative, but paragraph 12.3 makes it clear that the participation of insurers in the build back better supplement will be voluntary. Why was it not made compulsory for all insurers to offer this payment, given the urgent need to make our properties more resilient to flood risk in future? Do we have any information about the appetite of insurers to pay this extra supplement? The Minister quoted some statistics, but I would be grateful if he could confirm what proportion of insurers are providing the build back better facility.

Thirdly, I return to some of the concerns raised when the original scheme was introduced which still seem relevant today. Are the poorest and most vulnerable—those in tenanted and rented properties—still excluded from the scheme? It really does not seem right that people living in the same or adjoining properties could have access to different standards of flood insurance purely on the basis of the status of those living in the property. Do you still have to be the homeowner to qualify? Since the scheme now appears to be financially secure, what consideration was given to extending access to it to wider categories of claimants, such as tenants?

Can the Minister clarify the current status of farmhouses? I know that this has been a concern for the farming community. Most people would say that they are primarily residential properties, even if they also act as a business address. Can farmhouses join the Flood Re scheme?

Finally, could the Minister clarify whether we are still focusing on properties deemed in high-risk flood areas? Given the recognised threat of extreme weather events arising from climate change—the noble Baroness talked about the issues raised by the Adaptation Sub-Committee on this—how can we be sure that the right areas are now being designated as high-risk flood areas? Has not our experience of flood risk in recent years been that it is increasingly hard to define? Does the Environment Agency have the resources to reassess and redesignate flood risk areas from low to high risk with sufficient speed to ensure that insurers can respond accordingly? What further powers are the Government proposing to give to the Environment Agency to ensure that no further properties are built in high-risk flood areas against its advice, as can happen at the moment?

These are all issues that need to be addressed if Flood Re is to achieve its true potential. I hope the Minister can address them. I look forward to his response.