Flood Reinsurance (Amendment) Regulations 2022

Baroness Jones of Whitchurch 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.

[Lord Goldsmith of Richmond Park (Con)]

I thank noble Lords who have contributed to the debate. I will address the questions put to me.

As has been noted, the levy will reduce from £180 million to £135 million per year for the next three years. That is based on an assessment that £135 million is what is needed. The view is that we do not want to set the levy higher than it needs to be because it is effectively a form of tax.

I note the arguments put forward by the noble Baronesses, Lady Bakewell and Lady Jones, that everything suggests that flood risk is increasing and that volatile weather patterns are likely to become more so, but the scheme is not designed to be the UK’s answer to flood risk; it is a part of the answer. There is a whole bunch of other policies designed to make the UK more resilient in the face of increasingly volatile weather. For example, a major component of the environmental land management subsidy system is about better land management to create more resilience. Our tree strategy, the peat strategy and so on are all different components of it. There is the grey infrastructure component of the work Defra is doing as well. This is just part of the much wider approach the UK is taking.

The scheme is financially secure. Flood Re has met its initial liquidity and capital requirements and has a high solvency ratio. The Government have undertaken the necessary due diligence to assure themselves that Flood Re has enough funds to cover any losses as a result of a major flood event. The Government Actuary’s Department agrees that £135 million is suitable and well within the risk appetite of Flood Re.

The noble Baroness, Lady Bakewell, asked about the liability limit. Flood Re has set the liability limit at £1.9 billion from 1 April 2022 for the following three years. This is a non-statutory change already approved by the Secretary of State for the Environment, aligned with the Government’s assurance process.

Build back better will play a key role in helping to increase the resilience of UK households to flooding. We hope that it will drive a cultural shift across the insurance market, driving positive changes in supply chains, raising awareness and demand for property flood resilience, and helping to capture the evidence on the benefits of property flood resilience to support future changes in the market.

Research by Defra and Flood Re has demonstrated that the additional investment for flood resilience over standard repair can be as high as £35,000, but averages to around £5,200. However, the Government recognise that the cost of making different properties resilient may still exceed the contribution from build back better. Insurers and/or the householders can choose to pay for build back better above the £10,000 cap if that is what they want to do.

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I hope that I have covered the questions put to me. The scheme is necessary; it helps improve the efficiency and effectiveness of the Flood Re schemes and builds a nation more resilient to climate change. I hope that I have reassured noble Lords on their questions.

[Baroness Jones of Whitchurch (Lab)]

Before the Minister sits down, one question that I do not think he addressed was about high-risk flood areas. At the moment, you can access the scheme only if you live in a high-risk flood area. Obviously, that is a moveable feast these days because of extreme weather events, so it would not necessarily be the traditional areas that get flooded. There could be flash flooding in many parts of the country for all sorts of reasons. How often does the Environment Agency update that information and allow new properties to come onstream to be insured under the scheme? If we are not careful, it could become outdated very quickly and not be available to all those categories of homes that need it.

[Lord Goldsmith of Richmond Park (Con)]

The noble Baroness makes an important point. I am told that the Environment Agency will reissue a map of flood risk some time in 2024. As she says, even that new map will need to be continuously updated. One hopes that those areas at high risk today will not necessarily be at high risk in the years to come if the measures that we invest in now are carried out appropriately and if our rationale and assumptions are correct.