Flood Insurance

Dominic Raab Excerpts

Tuesday 26th March 2013 Commons Chamber

[Mr Dominic Raab (Esher and Walton) (Con)]

I beg to move,

That this House notes the Environment Agency’s estimate that 570,000 properties in England and Wales are at significant risk of flooding; recognises the efforts of the insurance industry and past and present governments to reach agreement to ensure flood insurance will be made available to all homes and small businesses beyond June 2013; calls on the insurance industry to negotiate in good faith to conclude those arrangements; and further calls on the Government to acknowledge the need to provide some support for those arrangements and ensure that resilience and adaptation to flood risks and other natural hazards are amongst its highest environmental priorities.

May I first thank the Chair of the Backbench Business Committee for granting this debate and the sponsors of the motion, who represent four parties across the House?

Today’s debate comes just three months before the expiry of the statement of principles agreed by the previous Government with the Association of British Insurers. The statement governs the provision of insurance to properties that are at “significant risk” of flooding—that is, properties that have a one in 75 or greater chance of being flooded in any given year. With the deadline for agreement looming, Ministers and the ABI remain deadlocked in negotiations. The House will be only too aware that the consequences of failing to broker a deal would be devastating.

If we were to move to an entirely free market model it is estimated that 1,113 businesses and homes in my constituency alone would face dramatic hikes in their premiums or even a refusal to insure. Nationwide, 215,000 more homes would face annual insurance premiums of more than £750. For owners who could not obtain affordable insurance, the risks are worse still. With a typical flood causing between £20,000 and £40,000 of damage per property, many small businesses and families would face crushing costs. Meanwhile, the Council of Mortgage Lenders warns:

“Uncertainty about the future cost and availability of insurance may affect the ability to sell or obtain a mortgage on a property,”

affecting up to 83,000 homes. Home insurance premiums are already rising as insurers prepare for a worst-case scenario. Constituents in Thames Ditton in my constituency are already reporting steep rises.

We urgently need a new, sustainable, long-term agreement. As far as I am aware, the only proposal on the table is that from the ABI, namely its “Flood Re” insurance scheme.

[Mr Laurence Robertson (Tewkesbury) (Con)]

I am grateful to my hon. Friend for raising this very important subject. Does he agree that another factor to consider is the level of excesses that insurance companies charge? If they set the excess at £20,000, the family affected are, in effect, not insured.

[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.

[Several hon. Members]

rose—

--- Later in debate ---

[Mr Raab]

I thank the Backbench Committee for this debate, and I thank all hon. Members who have contributed for their excellent speeches. Some of them talked about the local dimension and some mentioned the national implications of these issues. Given the lack of time, I will not go into detail on all of the contributions, but the hon. Member for West Lancashire (Rosie Cooper) talked about the lack of a joined-up approach locally. My hon. Friend the Member for Oxford West and Abingdon (Nicola Blackwood) talked about the human dimension to local flood damage and the importance of planning in the mitigation of flood risk.

The hon. Member for Kingston upon Hull North (Diana Johnson), my hon. Friend the Member for West Aberdeenshire and Kincardine (Sir Robert Smith) and the hon. Member for Wansbeck (Ian Lavery) talked about the local aspects of flood insurance.

My hon. Friend the Member for York Outer (Julian Sturdy) made an important point about what local community initiatives can do to reduce flood risk, and my hon. Friend the Member for South East Cornwall (Sheryll Murray) highlighted the human toll across Cornwall. I am sure the whole House joins her in expressing our condolences to the bereaved family of her constituent.

There were other powerful contributions. My hon. Friend the Member for Cardiff North (Jonathan Evans) made a powerful speech on his work with the all-party group. My hon. Friend the Member for Portsmouth North (Penny Mordaunt) talked about the problem of planning approvals in the floodplain. Other hon. Members were unable to attend the debate—for example, my hon. Friend the Member for Brigg and Goole (Andrew Percy)—but have expressed support for the motion, and I welcome that.

The shadow Minister gave an important speech. He tracked the recent negotiations with a fine-toothed comb, if, at points, rather selectively. He had rather less to say on the previous Government’s progress, but none the less made some important points.

The Minister described the arduous and urgent negotiations with the ABI and the importance of delivering a legal, workable deal that delivers value for money. I am sure the whole House joins him in wanting to achieve that result. We do not expect him to negotiate in public, but we do need urgently to deliver a new deal on flood insurance. We need to strengthen flood defences, address the planning failures of the past and ensure that UK environmental policies place a greater emphasis on resilience and adaptation in the future. I commend the motion to the House.

Question put and agreed to.

Resolved,

That this House notes the Environment Agency’s estimate that 570,000 properties in England and Wales are at significant risk of flooding; recognises the efforts of the insurance industry and past and present governments to reach agreement to ensure flood insurance will be made available to all homes and small businesses beyond June 2013; calls on the insurance industry to negotiate in good faith to conclude those arrangements; and further calls on the Government to acknowledge the need to provide some support for those arrangements and ensure that resilience and adaptation to flood risks and other natural hazards are amongst its highest environmental priorities.