Water Bill

Lord Campbell-Savours Excerpts

Monday 31st March 2014 Lords Chamber

These things often happen quicker that we can imagine. Just because we have had one very bad winter with a lot of floods, does not mean it will not happen again quite quickly. It was always my experience that when we had a major drought, it was immediately followed by a flood when I had responsibility for dealing with it. Whenever I was told that there was a one in 100-year risk, the flood happened the following year and probably twice in the next two or three years, so this may happen quite quickly. In that case it may be my noble friend Lord De Mauley who receives the flak and the present Government, or it may be the successor Government in the very near future. Therefore, I hope we can receive some reassurance that this is not the end of the story, and that every effort will be made to improve on the negotiated scheme that we have before us.

[Lord Campbell-Savours (Lab)]

My Lords, as in Committee, I need to declare an interest in that I have a leasehold interest, with my wife, in a band G home on the Thames built on the flood plain. My flat is not threatened by flooding, has never been flooded and can never flood because it is on the second floor, and the whole of the south of England would have to be flooded before we were. Nevertheless, I have to report that a car park area that serves our block of flats was recently subjected to some flooding, and it is with that in mind that I feel that I should restrict my comments today and limit what I have to say, and I will not be voting on the issue.

All I want to do today, without commenting on the issue in the light of what has happened, is to read a letter which has been sent to my noble friend Lord Whitty, the noble Earl, Lord Lytton, the noble Baroness, Lady Bakewell of Hardington Mandeville, Mr Owen Paterson MP and Ms Anne McIntosh MP, who I understand is the chairman of the Select Committee in the House of Commons. I simply want to read the letter, which the Minister has seen, because I think that it should be on the record so that all those in the industry outside can read what it says.

The letter is from a Mrs Beverley Morris of Topcliffe Mill, Topcliffe, Thirsk in North Yorkshire, and she has given me permission to read it. Part of it states:

“If I may give a brief summary of our current situation to further expand upon our current predicament.

This building, known as Topcliffe Mill (Mews), and built as a water powered corn mill circa 1800, was subject to a ‘once in 100 hundred year’ flood on 26th September 2012. Apartments 1, 2 and 3 on the ground floor were flooded along with 2 communal areas. Three houses in the same location behind the Mill were also flooded”.

Here we are talking about a leasehold property.

“Much of the North East was flooded during this period and Topcliffe Mill was ‘sandwiched’ between the swollen River Swale to the front of the building and the saturation of the fields to the rear.

Topcliffe Mill building insurance policy is purchased by a small management company, Town & County Properties (Wharfedale) Ltd and the premium (pre flood) was just shy of £5,000 for the year 2012, divided between the 12 homes. Post flood and following the claim, the renewal premium was and continues this year at £23,750 divided between the 12 homes, an increase of almost 500% per home. My husband and I are now paying £2,000 per year for a Band C, 4th floor”—

fourth-floor—

“domestic flat that we have made our home for the past 10 years. As we are not in a position to pay this amount up front and on demand, arrangements have been made to pay by instalment, which in itself incurs extra charges.

The ABI are offering assurances that ‘there is no systematic problem with freeholders being able to obtain insurance for their leasehold properties’. Our management company, have indeed secured building insurance, as I understand they are legally required to do, but at what price? The insurance companies, who know this, have our management company and us over a barrel it seems.

T & C Properties Ltd had their agent, J M Glendinning of Guisley in Leeds thoroughly search the insurance market for a better deal and it was to no avail. As owners, we took on the challenge of checking out the markets ourselves and if required we can supply documentary evidence of refusals, although many refused point bank on the telephone to even consider it. Our management company and their agents are also prepared to lend their testament to the situation we find ourselves in. I am at a loss to see how this scenario fits with the ABI’s explanation either now or in the future if leaseholders are excluded.

Referring again to the Food and Rural Affairs Committee meeting 11th March 2014, Ms McIntosh discussed with Aiden Kerr the issue of SME exclusion from Flood Re. He gave his explanation stating that Flood Re ‘is limited to households’. As we are not an SME but a collection of households, it begs the question, does being a leasehold define us as not a household?

During the session 11 February 2014 you drew attention to the services of the Financial Ombudsman Service. We, however, have no recourse to them to make any complaint into the risk assessment that led to our mighty high renewal premium and nor will we in the future, because the policy is not in the name of the domestic leaseholder. Would the management company complain on our behalf? Doubtful, since they are not financially affected, transferring all the associated charges directly on to the leaseholder …

The notion that one might sell up and move on, being unable to meet the management fees is something of a forlorn hope. Everyone is aware of how property values have fallen and the North East of England is not experiencing the same improvement to values as the south. Add to this a history of flood— albeit the first in 100 years. The financial security of our household stands to be jeopardised, in terms of our ability to meet mortgage payments due to over stretched resources and/or the ability to secure reasonable flood insurance.

The opportunity to afford us the same level of assistance being offered to freeholders is likely to slip by if we are not included in the Flood Re scheme. Given that the decision to have a cap in place in the medium term has been taken, I feel it only fair and just that leaseholder homes are included”.

As I said, my position has changed since the last time I debated these matters, but that testimony is from someone who is directly affected, and a five-times premium increase in the north of England on a band C flat on the fourth floor of a block of flats is something that Ministers should seriously think about. Indeed, I would have thought that Parliament would have addressed that problem.

[Baroness Parminter]

My Lords, the aim of Flood Re is to support people at the highest risk of flooding who would struggle to find affordable insurance on the open market. The way in which it is funded, as the noble Earl, Lord Lytton, has reminded us, is via a levy to provide a funding pool to use for the purposes of the scheme. Many contributors are likely to be at a low or no risk of flooding, but this approach spreads the risks across a large population to make it more affordable.

The question that we are trying to address here is whether it is fair to include specifically band H council-tax and post-2009-built homes—I am not going to address leaseholders because, as other noble Lords have mentioned, we are going to come back to this with an amendment from the noble Lords, Lord Whitty and Lord Grantchester. There will be a small number of asset-rich but income-poor in band H houses. In Committee in this House, the Minister confirmed that 0.5% of such households are in the five lowest-income deciles, or 45 properties in flood risk areas.

A letter to the Committee in the other place from the Parliamentary Under-Secretary Dan Rogerson on 10 December 2013 confirmed that the cost to add band H houses to the scheme would be between about £1.4 million to £5.4 million, funded by an increase of up to 3% in the levy paid by all householders. Given that small number of asset-rich but income-poor, and the high cost to add these to the scheme, I do not support their inclusion in Flood Re—indeed, it would be a regressive measure—but I would certainly hope that lead local flood authorities will target some of their funding to address the impacts on vulnerable elderly people in their areas. Targeted mitigation of the impacts of this exclusion would be a far better approach and, as the noble Lord, Lord Campbell-Savours, said, is supported by the National Flood Forum.

Houses built post-2009 were excluded by the previous Administration from the statement of principles, which preceded Flood Re—the reason being that, with strong planning policies in place, such homes should have been properly assessed for flood risk. Equally, the date as set was important to avoid incentivising development in areas of flood risk. I accept that that is not perfect, but the exclusion of post-2009 from the band H properties was widely consulted on by the Government last year in advance of drawing up these proposals and was broadly supported. Hundreds of thousands of homes will benefit from Flood Re and, frankly, we need to get on with it. I am satisfied that this approach is fair and targeted at those most in need, and with regret I therefore will not be supporting the amendment.

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[Lord De Mauley]

My Lords, I thank the noble Earl, Lord Lytton, for his Amendments 89 and 90. He raises issues which I know are of concern to people and I thank all noble Lords who have spoken on all sides of the argument.

Amendment 89 to Clause 51 would require that all properties included in the calculation of the levy are eligible for the scheme. It is important to remember that while many homes in the United Kingdom are at some risk of flooding, Flood Re is designed to address an affordability issue for the 1% to 2% at the highest risk of flooding. The levy will provide Flood Re with a funding pool which will be combined with the premium income from those policies which are to be ceded to Flood Re. This will be used for the purposes of the Flood Re scheme, including the purchase of reinsurance and payment of claims. The purpose of having a pool, as is the case for much of our taxation, is that costs are shared by many so that those most in need can benefit. If everybody who paid the Flood Re levy stood to gain, there would be fundamental implications for the required amount of the levy. Alternatively, if the levy was limited to flood-prone households, the pool would not be large enough to have a significant impact on prices and therefore on the affordability of flood insurance.

The insurance industry has been clear that low-risk and no-risk householders have historically subsidised flood insurance for those at a higher risk of flooding and that the move to risk-reflective pricing will over time remove this cross-subsidy from the market. The levy simply replicates and formalises this existing cross-subsidy. Indeed, the ABI has assured us that the levy can be introduced without having an impact on bills in general for householders at a low risk and no risk of flooding, for those in band H or for those with properties built after 1 January 2009—that is, those outside the pool.

If I understand the noble Earl’s intention correctly, I think he is particularly concerned to ensure that those properties which are not eligible for the scheme—such as band H properties, properties built after 1 January 2009 and certain leaseholders on commercial policies—either stand to benefit from Flood Re or do not pay the levy. While I understand that cross-subsidising something from which you will receive no benefit might be perceived as unfair, I have explained why there always have to be some net contributors to make a pooling system work, and this includes the overwhelming majority of households at low risk or no risk of flooding. We discussed the rationale for the scope of Flood Re at length in Committee, and I explained that we think that we have got the balance right. The Government’s approach was widely supported in the response to the 2013 consultation. This approach means that those who are most in need of support will receive it to enable a smooth transition to the free market.

The noble Earl commented on the complexity of the scope of Flood Re. The proposed criteria reflect the current situation for purchasing a domestic insurance policy. We are not seeking to change the circumstances under which insurance is purchased through Flood Re. We must remember that Flood Re is designed to help those people at the highest flood risk, which we estimate could be around 500,000 households. I have heard some very fanciful numbers being bandied around, and they all miss this point. I am not saying that the Government are not still listening to the debate. We will monitor the market, as will the ABI, and we will publish our findings. Should the evidence point to specific issues with insurance for particular sectors, we will discuss with the insurance industry what might be possible.

[Lord Campbell-Savours]

The Minister referred to fanciful figures. The figures I produced on behalf of the lady in Thirsk were real figures showing a five-times increase. She and the 11 other people in flats in the same block are not covered. How can the Minister give an assurance that it will have very little impact on these sorts of people?

[Lord De Mauley]

My Lords, I was not for a moment suggesting that the lady to whom the noble Lord referred was one of those bandying around that sort of figure—by no means. It is difficult for me to speak about a very specific instance but, if I can, I will come back to that later. I was referring to estimates of the number of households involved. I hope the noble Lord understands that.

Several noble Lords referred to band H properties. In designing Flood Re, we have been very clear that we want to target the benefits where they are most needed while not increasing the costs for those not at flood risk. On that basis, we believe that it would not be justified for band H and equivalent properties to be included. The progressive nature of Flood Re received wide support in the public consultation.

Let us be clear that the exclusion of band H properties was set out explicitly as part of the June 2013 memorandum of understanding. This document reflects the needs of both parties and was agreed by the Government and the ABI on behalf of its members. In designing the scheme, the Government and the industry needed to ensure that the pool was viable and affordable. Including band H properties would increase the costs of Flood Re overall, which could result in a reduction in the benefits to households in lower council tax bands or an increase in the levy for all households. We stand by the decision to target support to those in lower council tax bands, as reflected in the memorandum of understanding.

Responding to the points raised about affordability for those in this council tax band, our analysis suggests that relative to other bands, a move to risk-reflective pricing would have limited impact on the affordability of a combined insurance policy for band H households. The noble Lord, Lord Whitty, referred to concerns that those households, which might be asset-rich but income-poor, would be at risk though this approach. We looked closely at this. According to the 2011 living costs and food survey published by the Office for National Statistics, 85% of those who live in band H properties and hold a combined insurance policy are in the top 30% of earners with 48% in the top 10%. More significantly, perhaps, only 0.5% of such households are in the five lowest income deciles, which translates to roughly 45 properties in flood risk areas. I think my noble friend Lady Parminter mentioned that.

The noble Earl, Lord Lytton, the noble Lord, Lord Whitty, and others referred to small businesses. As I said in Committee, we gave careful thought to the scope of the Flood Re scheme and consulted on the proposed figures on the domestic insurance market, which received broad support. The consultation responses did not provide evidence of widespread problems for small businesses with secure and affordable cover, although anecdotal examples of problems in some specific geographical areas were put forward. A government survey of more than 9,000 small businesses in England found that less than 1% of businesses had experienced difficulty getting property insurance in the past year due to the risk of flooding, and that no businesses had been refused insurance cover due to the risk of flooding.

--- Later in debate ---

[Lord De Mauley]

My Lords, I am grateful for the opportunity provided by the noble Lord, Lord Whitty, to discuss the eligibility of leasehold and tenanted properties for Flood Re. In Committee, I said that we would take more time to look at the issue for lease- holders with the ABI and that we would provide further information on the scope of Flood Re.

We have developed with the ABI a briefing note that sets out the scope of Flood Re and covers proposed new subsection (1) in the noble Lord’s Amendment 89B. In summary, the note, which is available online, confirms that domestic contents policies will be available to all under Flood Re, regardless of whether properties are leasehold or freehold, rented or owner-occupied, except those properties in band H and those built from 1 January 2009.

Leasehold houses will also be in scope of Flood Re, provided that the leaseholder lives in the property and purchases the buildings insurance in his or her own name. Flats will be eligible, provided that there are not more than three flats in the building and that the freeholder, or one of those with a share of the freehold, lives in the building and takes out the cover. Setting the eligibility to a maximum of three flats reflects the general limit that the insurance market is willing to cover under a domestic or personal lines policy. There is already a competitive market for insurance for properties with four or more units, which we expect to continue. As I have already said, we and the ABI will monitor the market to ensure that that remains the case. We believe that a significant proportion of the leasehold sector will be in scope of Flood Re, but I should emphasise here that we expect most properties will not need to be in Flood Re and will find better prices through normal routes.

The noble Lord, Lord Whitty, suggests that that is all very complicated and does not go far enough. We have looked carefully at that with the ABI. Flood Re should be available only to those who need it. Indeed, in an earlier debate the noble Lord to some extent agreed with that. The ABI has assured us that the same systemic issues relating to availability and affordability do not exist for larger-scale leaseholders and commercial managing agents as in the domestic home insurance market.

The insurance industry has recently written to assure the Government that it does not expect there to be widespread issues over access to the insurance market for those parts of the leasehold sector which will be out of scope of Flood Re, which I am sure that noble Lords will agree is very welcome reassurance. The industry is clear that there is plenty of capacity to continue to provide insurance on a competitive basis.

I turn to the tenanted sector. As we discussed at some length in Committee, landlord insurance is out of scope for Flood Re for buildings cover. Landlord insurance is classified by the insurance industry as commercial. However, again, we have been assured by the industry that the majority of landlords will be able to find a more competitive rate outside Flood Re.

I emphasise that the proposed scope was not developed on the basis of cost: it is the nature of the policy which is key. The Government are clear that it would not be appropriate for landlords, who gain commercially from renting properties, to benefit from a subsidy on other households.

[Lord Campbell-Savours]

The Minister referred to the fact that the ABI has given assurances that that insurance will be available at competitive rates. Were they oral or written assurances? If they were written, is it possible for those assurances in writing to be put into the public domain so that interested parties can examine the assurances that the ABI has given to the Government?

[Lord De Mauley]

That is a very good point, my Lords, and I will see what I can do.

The Government collect certain information and data as part of the English housing survey. However, the granularity of data on the different parts of the sector sought under the amendment is not currently available. Data are collected from owner-occupied homes on whether the home is owned leasehold or freehold, but not from homes that are let in the private rented sector or from the social rented sector. In the past, those partial data have been used to estimate the total number of leasehold domestic properties in England across all tenures, although I understand that the methodology used is currently under review.

The 2011 census provides some information about whether people live in a flat or a house and whether they own it or rent it, but did not collect data on the number of leasehold domestic properties. There are also no data sets that would distinguish between smaller landlords and large multisite commercial operators, as far as we are aware.

The insurance industry could provide information which would help with a general estimate of the cost of including additional properties to Flood Re. However, the value of that would be limited without the numbers in each of the categories specified in the amendment and how many of those are at sufficient flood risk to be ceded to Flood Re. We have looked at a range of potential address-level data sets to try to map their records to flood risk, but again the data are unsuitable.

The conclusion has to be that what is specified in the amendment is unachievable to any degree of accuracy. It would also be only a snapshot in time and would quickly become out of date. The Government and the ABI have committed to monitoring the market—including for both domestic and business premises.

The noble Lord, Lord Whitty, suggested that there had been no direct engagement with the property sector. We consulted publicly on our proposals and received representations from the property sector. Indeed, I met representatives of the leasehold sector and asked them to come forward with evidence that the same problems exist in the commercial insurance market. I must say that evidence received to date is very limited, but that offer remains.

I therefore argue that reporting as set out under the amendment is not needed, as the market monitoring already planned will provide data on how the market is operating. I assure noble Lords that we will keep this matter under careful review. As I said, the Government also plan to publish the findings and make them available to Parliament.

The noble Lord, Lord Cameron, asked why we cannot treat landlords of just one or two properties differently from the more large-scale landlords. We have not heard evidence of widespread problems for smaller landlords in securing affordable insurance and there is therefore no apparent need to extend the scope of Flood Re to include them. Furthermore, it would not be practical to ask insurers to try to distinguish between different types of landlord. With the exception of policies purchased in a block or those purchased under a business name, many insurers would find it difficult to tell whether landlords have a large or a small property portfolio. This is not just about pricing policies: it would also make it more difficult for insurers to work out the market share when paying their share of the levy.

Turning back to the point made by the noble Lord, Lord Campbell-Savours, I understand that it was made in a letter to the Secretary of State, and I can provide a copy of that to noble Lords who have participated in this debate. That might be helpful.

For the reasons that I have set out, I hope that the noble Lord will be prepared to withdraw his amendment.

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[Lord Krebs]

My Lords, as the noble Baroness, Lady Parminter, has said, this amendment is concerned with the possible surplus or cash reserves that Flood Re might build up. We have to recognise that although Flood Re is being designed as an integral part of the insurance industry it will be a public body spending public money and will operate on a not-for-profit basis. The noble Baroness, Lady Parminter, has indicated and the Government’s own figures suggest that there might be reserves of more than £100 million after one year. If that surplus exceeds the amount that is required to cover claims in any one year—again, the noble Baroness indicated a figure of £250 million—it would seem perfectly reasonable for that money to be used to manage down Flood Re’s own exposure to future claims and it could do so in a highly cost-effective way. This is about value for money. One estimate is that £4,000 spent on a property could prevent a number of claims on Flood Re averaging £45,000 a time, so the return on investment is going to be enormous.

The adaptation sub-committee which I chair has estimated that there are 190,000 properties in England where fitting flood-protection measures would be cost-effective, but progress in fitting them at household level has been very slow. In fact, the rate of uptake would need to increase by a factor of 20 to fit all such measures within the lifetime of Flood Re. This amendment recognises the potential to do more to protect high-risk households and the opportunity that the surplus reserves might represent. Investing in resilience now would leave high-risk households better able to afford flood insurance once Flood Re has withdrawn and, rather than adding to the cost of the levy, investing in this way promises to help minimise the costs of Flood Re over the lifetime of the policy.

[Lord Campbell-Savours]

The noble Lord referred to 140,000 properties. How would they be prioritised? How would they be selected to be subject to the benefit of this measure?

[Lord Krebs]

The figure I mentioned was in fact 190,000 properties. I do not have the detail of how they would be prioritised, but over the lifetime of Flood Re it is hoped that all 190,000 could be fitted with household protection measures that would increase their resilience against future flood risk.

As I was saying, investing the surplus from Flood Re would help to minimise its costs over the lifetime of the policy. To achieve that, Flood Re will have to invest in flood protection to reduce future claims. As this amendment indicates, guidance is needed on whether and how surpluses might be used and under what circumstances investment in household resilience should be pursued. So it is not prescriptive; it is just saying that guidance should be included. I think that perhaps answers the noble Lord’s question.

[Lord Campbell-Savours]

My Lords, I am taken a bit by surprise by this amendment. I had not intended to speak at all but as the noble Lord was developing his arguments I began to realise what the value of this could be. I have a letter here from Keswick Flood Action Group which I referred to in Committee. It makes recommendations on the question of the reinstatement of homes and resilience. I want to read on to the record what it says because most of my contributions on this Bill up to now, certainly in Committee, have drawn on information that has been brought to me by people who have been flooded, because very often they know more than anyone else. Lynne Jones, chair of Keswick Flood Action Group, says that the Government should,

“pass legislation so that insurance companies are required to reinstate homes in a flood resilient/resistant way. Insurance companies, quite rightly, will not pay for ‘betterment’ but these days they have to reinstate with insulation to regulatory standards, even if no insulation was present before, because they are required to do so by law. So why can’t flood measures be treated in the same way?”.

She goes on to make a very simple proposition which, when I think of the flooded properties that I surveyed when I was an MP, seems to me quite logical:

“For example dropping the electrics down from the first floor so raised sockets rather than rewiring from ground up; replacing wood floors with solid waterproof concrete etc”.

Then she goes on to suggest that the Government,

“provide people with independent advice on property reinstatement, maybe via Local Authorities’ Buildings Regulations Officers”.

If there is a surplus, why not consider spending some of it in this sort of area? She goes on to say:

“What people need is knowledgeable counsel from somebody who isn’t going to profit from the works. Flood victims are the target for every rogue trader under the sun post-flood and not everyone knows what products are available/would most suit their needs. Such decisions come at a time when they are exhausted, stressed and suffering financial hardship, they are truly at their most vulnerable”.

As I said, when I was an MP and also afterwards I visited homes where people had been flooded and we know there is tremendous distress. If there are these surpluses, perhaps we should ask whether they can be deployed as part of the process of advising people so that the rogue traders do not go in and do the work and rip people off. That is a far more professional approach. The simple idea of feeding electric wiring upstairs as against downstairs seems absolutely elementary. I wonder how many properties have been done up with grants from government and bills paid by insurance companies over recent years where those very simple, remedial steps to dealing with problems in particular homes have not been taken.

In many ways I think this is a very interesting amendment. I had not really thought of the surpluses. We do not want to waste money but surely it can be used in such a way as to promote the policy of developing actions for resilience.

[Earl Cathcart]

My Lords, I am afraid I cannot support this amendment. To me it shows a misunderstanding of the role of insurance more generally and of Flood Re in particular, which must build up its funds from premiums to cover current and future losses smoothly. The scheme already has five-yearly reviews so that all assumptions can be reworked and contributions adjusted, either upwards or downwards. Diverting funds into the totally separate adventure of pre-emptive risk mitigation is not a function of insurance and nor should it be for Flood Re. The analogy is asking car insurers to invest in better road signs or road infrastructure. It might help mitigate the risks but it is not the role of the underwriting industry; it is the role of government, national or local.