Water Bill

Lord De Mauley Excerpts

Tuesday 11th February 2014 Lords Chamber

[Lord Oxburgh]

My Lords, I think that it depends almost exclusively on how that water has been treated by the company that has used it.

[The Parliamentary Under-Secretary of State, Department for Environment, Food and Rural Affairs (Lord De Mauley) (Con)]

My Lords, as the noble Lord, Lord Whitty, has explained, Amendment 154 would require onshore oil and gas operators to provide financial security when applying for an environmental permit so that funds would be available to deal with any water pollution incident caused by the operator. The amendment would impact on both the conventional and unconventional oil and gas sectors. It would address any pollution that they caused to the water environment but not any other damage that might be caused by their activities.

We want a successful industry in this country—an aspiration supported at Second Reading—to provide us with an important source of gas for our future, but it is vitally important that it is safe. We already have a well established UK conventional onshore oil and gas industry that has happily coexisted with local communities, in some cases for half a century or more. This has been achieved not least because the industry has maintained a good record of environmental responsibility and competence. The existing controls and the application of good operational practice have served us well to prevent pollution from onshore oil and gas activities and to tackle in an appropriate way any problems that emerge.

The Department of Energy and Climate Change assesses as a matter of course whether a company has sufficient funding for its planned operations prior to awarding any licence. It also checks at the drilling stage and, where relevant, at the production stage that the company has appropriate insurance. Similar financial competence checks are also carried out by the Environment Agency as part of the permitting process. In the event of serious damage to surface or ground-water, the Environment Agency and Natural Resources Wales have powers, under the Environmental Damage (Prevention and Remediation) Regulations 2009 and the equivalent Welsh regulations, to serve a notice requiring that the polluter pays to clear up the pollution. If a significant environmental risk becomes apparent, the Environment Agency has the authority to stop the activity. These powers apply to a wide range of operations and activities undertaken by different industries. I do not think that it would be appropriate to create any specific provisions for the oil and gas industry.

However, the Government are aware that there are widely felt concerns about the capacity of companies exploring for shale gas to tackle any liabilities that might arise. This is the concern that the noble Lord, Lord Whitty, is pointing to. Therefore, I am pleased to inform your Lordships that the Department of Energy and Climate Change and the shale gas industry are working to put in place a robust scheme that would cover liabilities even if the relevant operator is no longer in business. They are also in discussion with leading insurers about proposals to build expertise and capacity in the insurance market to facilitate the development of products specifically appropriate for unconventional operations, which in turn could facilitate the development of an industry-wide scheme. In addition, while we already have a robust regulatory framework in place, I can confirm that it will be reviewed and refined as appropriate as we move towards the production phase. The question of the noble Lord, Lord Oxburgh, will be addressed in that process. This regulatory review will include the question of environmental liabilities in the wider sense, not solely relating to water.

I am sure that noble Lords will agree that these two initiatives, taken together, constitute a sensible approach towards ensuring that liabilities are covered in a comprehensive and proportionate way, rather than taking what might be a rigid legislative approach on a piecemeal basis. I hope that this news provides the reassurance that the noble Lord, Lord Whitty, needs that the Government are taking the right steps to ensure that liabilities are dealt with appropriately, and that he will feel able to withdraw his amendment.

[Lord Whitty]

My Lords, I thank the Minister for that. It is a degree of reassurance. I thank the noble Lord, Lord Oxburgh, for expanding the area of concern into the issues of the effect that bringing sea-water on land for use may have on watercourses and the possibility of contamination of the sea-water itself.

There is the potential for such a widespread effect on the water system that I feel justified in bringing this amendment before the House. I am pleased to hear the Minister say that the industry, the insurers and the Government are looking at a scheme. This obviously recognises the very widespread concern in the country about the possible impact of fracking which, he is right to say, is wider than the issue of the effect on the water supply system.

I am still slightly concerned that we might get into a situation where, if the industry develops to the degree that many of its advocates suggest is possible, we end up with a substantial problem—a problem that could end up on the taypayer’s desk or bank account. In the nuclear industry we have provided for such a possibility for current operations, although obviously there is a huge legacy that has not been provided for and a huge bill for the taxpayer as a result. We have done the same on a much lesser scale in relation to landfill. We could probably also establish a regime in relation to fracking to ensure that this liability was covered. However, the Minister has indicated that there is some progress. I will watch this space, as I am sure will others. At this time, I beg leave to withdraw the amendment.

--- Later in debate ---

[Lord Whitty]

My Lords, in her opening remarks, the noble Baroness was correct to set this matter in the broader context of where we are now, and have been in recent years, with instances of serious flooding in Somerset this week, possible serious flooding in Surrey by the end of the day, that which occurred in Keswick not long ago; and the resources that are needed to ameliorate that position in the long term which are, essentially, the resources that the Government are putting in. We will no doubt return to that issue at some stage in these proceedings. However it raises the question of whose responsibility this is. I have slight reservations about these amendments in that regard. The public authorities and the Government have responsibility for ensuring that adequate resources are available for flood defence and catchment management to mitigate the impact of flooding and insurance and reinsurance schemes can help through their normal operations. However, insurers can insist on mitigation or flood recovery measures along the lines mentioned by my noble friend Lord Campbell-Savours as a condition of renewal or extension of policy cover or as a deduction, if you like, from compensation. That is a normal insurance operation.

These amendments seem to be saying that Flood Re would take on some public responsibilities and social objectives and have executive responsibility for delivering flood limitation measures. It is important and right that Flood Re should co-operate with the public authorities, landowners and everybody else in this area, so in that sense I support Amendment 156B. However, it is also important that we do not transfer the risk from public authorities and property owners to an insurance system which, at the end of the day, is viable only if it takes a cut from all policyholders, including those whose properties are not at all at risk of flooding.

This is a difficult issue. The noble Baroness referred to public money. In one sense public money is involved because we are legislating for the system and the Treasury will, therefore, regard the expenditure involved as public money, but it is not really public money—it is the policyholders’ money. At the end of the day, you cannot place too many responsibilities on the Flood Re operation when it is dependent on individual households and businesses paying into it for insurance purposes.

It may well be that a surplus is generated and that the assessment of who pays for flood defence is looked at more broadly. Clearly, there are limitations on public expenditure and expenditure on better flood defence and catchment management could be met by those who are the most direct beneficiaries of it. You could argue that insurance companies themselves benefit from fewer claims as a result of more effective flood defence, but that is a slightly wider argument than placing the statutory responsibilities for which these amendments ask on to Flood Re itself. I think that that is slightly going round the back door.

As I say, I am slightly torn on this issue because I agree with a lot of what the noble Baroness and the noble Lord, Lord Shipley, said. However, I think that we would probably place too much responsibility on Flood Re if we adopted all these amendments.

[Lord De Mauley]

My Lords, I am grateful to my noble friend Lady Parminter for her amendments regarding flood resilience and Flood Re’s role in that matter, and to all noble Lords who have spoken. Regarding Amendments 154A and 154B, I agree with my noble friend Lord Shipley that we need to tackle the root cause of the difficulties with the availability and affordability of flood insurance—the flood risk that households face. The coverage of the tragic events of the past couple of months, which my noble friend Lady Parminter mentioned, have brought the full impact of this home to us all. I thought that the letter read out by the noble Lord, Lord Campbell-Savours, set out the problem very well.

Households benefiting from Flood Re need to understand both their flood risk and the likely impact of the withdrawal, over time, of the subsidy on their future premiums. I hope that noble Lords will be reassured to hear that we have agreed with the Association of British Insurers the principle that insurers will be required to provide such information to customers when a property is ceded to Flood Re and at the point of a claim. I hope that the statutory requirement for the Flood Re scheme to manage, over the period of the operation of the scheme, the transition to risk-reflective pricing of flood insurance for household premises also offers some reassurance.

The ABI has now come forward with draft proposals for ensuring that the correct incentives are in place to drive uptake of resilient repairs after a flood, particularly for those properties subject to repeat flooding. We are still agreeing the detail of this approach and I hope to have more to say on Report. Encouraging households to become more resilient over the period of the scheme will help to reduce the impacts of subsequent flooding.

Turning to Amendment 156A, the subsection that my noble friends seek to amend has been drafted in such a way to provide firm pointers as to what the Flood Re scheme administrator would need to have regard but is also intended to allow for a degree of flexibility that may be needed as the scheme is finalised. I assure noble Lords, in the strongest terms, that the Government are absolutely committed to taking forward Flood Re, together with the insurance industry, and that both parties are working very hard to achieve this.

We expect the administrator to act responsibly in its management of the scheme throughout its life and we have every intention of ensuring that it discharges its functions in a proper manner, supported by the duties we will place in secondary legislation. The regulations made under Clause 54 will be subject to public consultation and we are currently considering carefully the Delegated Powers Committee’s recommendation that regulations made under this clause should be subject to the affirmative procedure. I trust that this assurance puts on the record our intentions in this regard.

As regards Amendment 156B, my noble friends are right that co-operation between Flood Re and flood risk management authorities will be important, in particular should Flood Re wish in the future to commit any of its resources to supporting flood risk mitigation measures. Clause 54 provides for Flood Re to share information held by it with the Environment Agency, its equivalents in devolved Administrations and any other bodies specified in regulations. It also provides for Flood Re to have a duty to act in the public interest, so where it is in the public interest for Flood Re to co-operate with other risk management authorities, it would be expected to do so.

Under the Flood and Water Management Act 2010, flood risk management authorities have a duty to co-operate with each other in the exercise of their flood and coastal erosion risk management functions. This is because the causes of flooding can cross organisational boundaries and responsibilities. For example, flood risk management schemes to protect one area may make the problem worse elsewhere if there is not a partnership approach to developing solutions. Flood Re will not have an operational role in designing or implementing flood risk management schemes. As I think the noble Lord, Lord Whitty, suggested, that would be beyond the scope of Flood Re and would require different skill sets. Flood Re will therefore not have the same degree of interaction with the risk management authorities that they will have with each other. I am not convinced that there is a need to extend the requirements based upon the Flood Re body.

Perhaps I may say to my noble friend Lord Cathcart that while directly managing flood risk is not the purpose of Flood Re, it is nevertheless vital that Flood Re does not just deliver affordable flood insurance. It should also contain the right incentives for householders and insurers to put in place the necessary measures to become more resilient, since otherwise the effective price limits in Flood Re may remove some of the financial incentive to take such action. He has suggested—the noble Earl, Lord Lytton, also asked about this—that Flood Re will need to build up its reserves, which is of course right, but it will have access to the proceeds of the levy and be able itself to take out reinsurance. Can I offer to meet noble Lords before Report, on which occasion I shall of course be happy to provide an update? Perhaps I could also address the point made by my noble friend Lord Crickhowell at this stage. I shall come back on Report to noble Lords with more details of how those who flood repeatedly might be treated. For the reasons I have outlined, I hope that I can persuade my noble friend to withdraw her amendment.

[Baroness Parminter]

I thank the Minister for that helpful response and I thank Members around the Committee who have contributed to this debate. It has helped to spell out in more detail what we are all hoping to achieve for Flood Re. We do not expect it to be able to answer all the social objectives in terms of flood risk management, but we should accept that it is not just a flood insurance vehicle, important and critical though that is. It will also need to provide the necessary incentives to transition to a stronger place in the future. The wording of the amendment may not be ideal, but at least it has facilitated this debate. I hope that noble Lords are not disappointed in my having brought it forward in that light.

I thank the Minister for agreeing to meet noble Lords between now and Report. That will be helpful because there are still questions about the surplus and how it will be defined. The comments made by my noble friend Lord Cathcart and others remind me that we are not guaranteed surpluses with Flood Re; this is only what we are saying if those surpluses are achieved. I am happy to learn that the Minister intends to say more on this issue at the next stage. On that basis, I beg leave to withdraw the amendment.

--- Later in debate ---

The amendment of the noble Lord, Lord Moynihan, on businesses and my amendment on looking at the cost as well as the numbers of properties excluded would be helpful in informing future debate in this area. Meanwhile, my Amendment 161 provides for an appeals system. It is not for an appeal about whether you should be included at the beginning; it is not about whether band H should be included or not. It is about subsequent developments which might exclude people who initially appeared to be included in Flood Re, but were for one reason or another excluded. That can happen for a number of reasons, because either the flood risk or the actual incidence of flood has increased and therefore premium arithmetic changes; or it could be the situation I described in the previous amendment: the insurance company insists on mitigation provision as a condition of renewal of the policy but the policyholder feels that they are unable to meet that cost and are thereby excluded. That may or may not be justifiable in any particular case, but a system which is being legislated upon by Parliament has to have some element of natural justice built into it. Therefore, some form of appeal is needed in this whole range of provision. I hope that the Government can accept my Amendment 161, or at least provide something similar to it.

[Lord De Mauley]

My Lords, I recognise the high degree of interest in the policies that will be covered by our proposals, and those which will be out of scope. I hope that I can provide some clarity today on what is intended and the reasons for this.

The Flood Re proposition we are debating today was carefully designed to address specific, medium-term issues in the domestic insurance market. It was not, of course, designed in light of the immediate crisis that we are facing. I heard the passion and concern from your Lordships last week, yesterday and, indeed, today, about the specific, frustrating issues affecting the broader community, including small businesses and the farming industry. It is clearly a distressing time for many, and I know that they are in all our thoughts. Again, I pass on my thanks to the Environment Agency, the emergency services and the many volunteers, including the churches, who are working tirelessly to help.

However, it is not immediately apparent that there is an insurance angle to the current situation. Those who have insurance will be covered by their insurer. I am grateful, too, for the efforts of the insurance industry, which has been working hard in communities to ensure that damage is assessed and that claims are paid quickly. Until Flood Re is in place, insurers will continue to provide insurance cover. We have no understanding with the industry about expanding the scope of the scheme. I therefore ask that your Lordships forgive me if I combine my response to this debate to the specific proposition before your Lordships today.

I turn first to Amendment 155 of my noble friend Lord Moynihan, which would require the Secretary of State to publish a report on the ability of businesses in high flood-risk areas to secure flood insurance. I emphasise that decisions about the scope of Flood Re have been evidence-based. Compared to the household sector, there is not the same evidence of market failure in the commercial sector, where the insurance market is different. Bespoke policies are more routine—as my noble friend Lord Cathcart so eloquently explained—and they are already priced to risk. I listened with interest to what he, my noble friend Lord Ashton, and the noble Lord, Lord Whitty, had to say.

Businesses, unlike households, have a de facto income stream to cover their costs and can offset the cost of their insurance for tax purposes, so they are different. Flood Re, I emphasise, is concerned with helping to protect those relatively few low-income households from high insurance premia. My noble friend Lady Parminter was, perhaps, sceptical of the suggestion of a lack of evidence. A government survey of more than 9,000 businesses in England estimated that fewer than 1% of businesses had experienced difficulty obtaining property insurance in the last year due to the risk of flooding, and that no businesses had been refused insurance cover due to the risk of flooding.

For these reasons, we do not think that Flood Re would be the right solution for this diverse sector. While there does not appear to be a systemic problem with small businesses being able to obtain flood insurance—and our public consultation endorsed our approach—I recognise that some in areas of high flood risk may face specific issues. As my honourable friend, the Parliamentary Under-Secretary of State for Water, Dan Rogerson, said in Committee in the other place, the Government and the Association of British Insurers have both committed to monitoring the market for flood insurance, including that for small businesses. If sufficient evidence emerges of a problem for businesses, then we have both agreed to look at possible solutions. This research will be published and I will be happy to place a copy of that report in the Library when it is published.

Amendments 160 in the name of the noble Lord, Lord Whitty, and Amendment 160ZA in the name of the noble Earl, Lord Lytton, seek to require the Secretary of State to prepare and publish reports on the numbers of properties which would be out of the scope of Flood Re, including properties built after 1 January 2009, band H properties, leasehold properties and private rented properties. It is very clear from his amendment that the noble Lord, Lord Whitty, has clearly understood that any increase in the amount of policies ceded to Flood Re would need to be funded by others. Indeed, he explained that in his speech on the amendments. It is important that helping households at high risk does not lead to price rises for others.

My honourable friend the Parliamentary Under-Secretary of State for Water set out indicative numbers and costs for including in Flood Re band H and equivalent properties and properties built after 1 January 2009 in a letter to the Committee examining this Bill in the other place. I would be happy to ensure that this letter is made available to noble Lords who have participated in this debate today. However, I would not want noble Lords to think that the impact on the levy is the only reason for post-January 2009 and band H or equivalent properties being ineligible. As I noted, we were very clear in designing Flood Re that we wanted to target the benefits where they were most needed, while not increasing the cost of living for those not at flood risk. That is the basis on which we made the decision that it would not be justified for band H and equivalent properties to be included.

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—and this is in response to the noble Lord, Lord Campbell-Savours—only 0.5% of such households are in the five lowest income deciles, which translates to roughly 45 properties in flood risk areas.

The 2009 cut-off date recognises that new housing developments should be located to avoid flood risk; or where development in a flood-risk area is necessary, they should be designed to be safe and appropriately resilient to flooding and not to increase flood risk elsewhere, in line with the national planning policies in place. This date therefore reflects the fact that homes built since then should already be insurable at affordable prices.

As noble Lords may know, when the agreement between government and the insurance industry, known as the statement of principles, was signed in 2008, it was agreed that there should be a cut-off date, which was set at 1 January 2009. That marker has been in operation for several years and has been maintained under Flood Re proposals. To be clear, there has been no change in policy. Therefore for the reasons that I have set out, we believe that the proposed exclusion of properties built after January 2009 and band H properties is fair and in line with the Government’s objective.

[Lord Campbell-Savours]

I just want to press the noble Lord on band H. As I said, I myself have no interest in it. However, in light of what has happened in the Thames Valley, is there not an argument for reviewing those figures that the Minister has just given to the House, particularly as regards the percentage of people on lower incomes who by chance happen to live in those rather expensive properties?

[Lord De Mauley]

I am of course quite happy to review the figures and to write to the noble Lord on that.

On Amendment 160ZA on reporting on leasehold and private rented sector policies, I see that we will also discuss the proposals in this regard on Flood Re later on today. However, before I come on to the specific subject of reporting, I remind noble Lords that the key issue in determining the scope of Flood Re is whether the policy for a particular property is treated as commercial or residential by the industry. Commercial policies are out of scope of Flood Re, which is designed to support households. We believe this approach is fair and practical, and it was supported in the public consultation. However, we recognise that the leasehold sector presents a more complex situation, where the contents policy is classified as domestic but the buildings policy could be classified as either commercial or domestic and could cover multiple dwellings.

I have listened to representatives of the property sector who have come forward with concerns about the impact of the proposed approach on the leasehold sector. They highlighted in particular that those in a smaller building might find it difficult to afford cover in the open market. The ABI has assured me that there is no evidence of a systemic problem with freeholders being able to obtain insurance for their leasehold properties, which I am sure noble Lords will agree is very welcome. However, given the strength of feeling on the matter, particularly in light of the ongoing extreme weather conditions, we need to take time to consider it in more detail, although without evidence of market failure it will be difficult to justify action. We will examine the evidence further with the ABI and hope to provide an update on Report. We will also continue to monitor this sector over time, as a part of the commercial insurance market.

I will focus briefly on the subject of the private rented sector. I take this opportunity to explain that it is proposed that buildings insurance cover for landlords would be out of scope for Flood Re, although contents cover for tenants would be eligible. At this stage I reiterate my declaration of an interest as owner of a property that flooded in 2007. The reason that landlords’ policies are out of scope is primarily because insurers classify all types of landlord insurance as commercial business, while Flood Re is designed for the domestic market. However, it is also important to recognise that the inclusion of landlords would effectively mean that people who do not own their own home could, through their contents premium, subsidise people who own several.

Flood Re targets support towards those least able to pay, through council tax bands. A landlord’s ability to pay cannot be judged against the council tax band of the property he lets. For example, the landlord of a council tax band A property could receive the maximum support if landlords were to be included, even if they were perfectly able to pay. Landlords already benefit from tax relief on the cost of their buildings insurance policy. They can offset many of their costs through taxable allowances which can significantly reduce their tax bill.

--- Later in debate ---

[Lord Oxburgh]

Before the Minister sits down, I hope he can help me with a small matter, which nevertheless would be significant for a minority. Given the duration of the scheme, there is likely to be a rebanding of council tax during that time. Somewhere it needs to be made explicit what will happen to people who move up into, for example, band H during that time.

[Lord De Mauley]

I can count on the noble Lord to think of something that I did not arrive in the Committee equipped to answer. If I may, I will write to him.

[Lord Moynihan]

My Lords, I am very grateful to noble Lords on all sides of the Committee for the interest they have shown in this issue. Their contributions have demonstrated how critical it is and what should be in and what is out. I place on record my thanks to my noble friend the Minister for a very comprehensive reply on a lot of issues that have been raised on all sides of the Committee. The noble Lord, Lord Campbell-Savours, is a noble friend on this issue since I am in complete agreement with him. I do not agree with him on every occasion but I certainly do on this one. I say to him that it is not just that some householders did not buy their properties as band H properties; it is that there is no absolute correlation between personal wealth and band H occupancy, a point that I sought to demonstrate at Second Reading. If you accept that principle, surely it is wrong that band H should be automatically excluded. Indeed, the Minister, in his reply, mentioned the 45 properties that were in need of support; that is, owned by people who were not wealthy but would be automatically excluded as the Bill is drafted.

My noble friends Lord Ashton of Hyde and Lord Cathcart mentioned how complicated it would be to change the Bill to take appropriate care of small businesses. I agree that the Bill is complicated; it is complicated throughout. However, surely the thoughts of this House are with the SMEs, the pubs, the guest houses and the farms that have been devastated by the recent floods and cannot now secure affordable insurance provision. They have been hit incredibly hard. If it is not through Flood Re, surely we should be looking to deliver support for SMEs through an appropriate provision. I argue that the Bill is the right vehicle to do that.

I appreciate that my noble friend Lord Cathcart was eloquent in the detail he went into to secure his insurance for his egg business—or “an” egg business, to be fair to him. Such expertise cannot be expected to reside with every publican or small business at the centre of communities serving important commercial and social roles. We should look very carefully at this matter at a later stage.

My amendment simply allows us to study that in detail. I am very grateful to the noble Lord, Lord Whitty, for his support. I am also grateful to my noble friend Lord Campbell-Savours for highlighting the fact that this market will have markedly changed in the past three months. Of that, there is no doubt whatever. It is incumbent on your Lordships’ House and the Government to look at the extent to which that market has changed and to which we need to respond to those market changes.

While I hope that further consideration will be given to these issues—I, for one, will seek to bring them back for further consideration—for the time being, I place on record again my thanks to the Minister for his answer and beg leave to withdraw the amendment.

--- Later in debate ---

[Lord Whitty]

My Lords, I broadly support most of these amendments, but I have a few queries. I support the first two amendments, Amendments 156C and 156D, unequivocally. It should be part of the role of Flood Re to help raise awareness, both among policyholders and in the community at large, and it will need to do so in conjunction with the Environment Agency, local authorities and so forth. However, clearly, the insurers also have a responsibility, as is reflected in these amendments. This will help both the beneficiaries and the insurers to move to a more systematic, cost-reflective basis for the whole system over time. It is also true that the administrator should be required to produce a plan for the operation of that scheme, as provided for in Amendment 156D. There must also be an overall longer-term plan for transition over the 25 years of the plan, as is proposed by the noble Lord, Lord Krebs, and the noble Baroness, Lady Parminter.

I am less sure that we should stipulate a five-year review period in legislation. In a sense, the scheme is always under review and will be changed in the light of new advice or new experience of flood conditions. Tying this down to every five years may not be the most sensible thing to do. Part of that assessment would be to indicate what measures would be needed to reduce long-term costs, as provided for in Amendment 156F. Insurers may encourage both individual and collective schemes of mitigation. As I have said before, this may involve mitigation by the policyholders, as a condition of that policy, or as a “cream-off” from compensation received in order to renew the policy. The noble Lord referred to Flood Re’s assessment of the need to invest in order to save in the longer term. I understand all of that. I am, however, a little worried by the term “subsidising”, which is included in Amendment 156E. I am not sure who is subsidising whom in this context. If the noble Lord means measures such as these, I think that is appropriate, but I would not use that term, as it might suggest a cross-subsidy over and above what is already provided for in the scheme.

Even after the noble Lord’s gallant attempt at explaining Amendment 156G, I do not follow it fully. As I understand it, the objective is to keep the levy cost down for those outside the scheme and the means would be some sort of quota-sharing agreement. I bow to the greater expertise of those involved in the insurance industry to tell me whether that will work. Subject to those queries and my slight lack of comprehension on the last amendment, the noble Lord, Lord Krebs, and the noble Baroness are in the right territory with these amendments.

[Lord De Mauley]

My Lords, I concur with the noble Lord, Lord Krebs, in Amendment 156C that it is important that householders whose policies are ceded to Flood Re are aware both of the flood risk in their vicinity and of the transitional nature of the scheme. Knowing about flood risk is vital so that households can take simple steps, such as signing up to free flood warnings, as well as investigating longer-term options for managing their flood risk, and can understand the likely impact on their future premiums of the withdrawal of the subsidy from which they are benefiting.

We will work with insurers and Flood Re to support people at flood risk to plan for and adjust to risk-based pricing. I hope that noble Lords will be reassured to know that we have agreed with the ABI that insurers will be required to provide information to customers about their flood risk, Flood Re and the actions that they can take to manage this, both when a property is ceded to Flood Re and at the point of a claim. Of course, raising awareness of flood risk remains primarily a matter for risk management authorities, such as the Environment Agency, so it will be important to ensure that any action by insurers on behalf of Flood Re complements their work.

Turning to Amendment 156D, I understand that by changing the phrasing of the power in Clause 54(3) from “may” to “shall”, the notion that Flood Re is a transitional measure is strengthened. I point to the Government’s stated policy objective in the June 2013 public consultation that,

“there should be a gradual transition towards more risk-reflective prices”,

and to the existing provisions in subsection (2) of the clause, which may require the administrator to have regard to the transitional nature of the scheme in discharging its functions. We have been clear that there should be a gradual transition to more risk-reflective prices and that we are committed to ensuring that the scheme retains incentives for flood risk to be managed. The Government will not designate the scheme until we are satisfied with the industry’s proposals. As I have already said today, the regulations designating the scheme will be subject to public consultation and we are currently considering the recommendation of the Delegated Powers Committee that regulations made under this clause should be subject to the affirmative procedure. While I recognise that the shift from a permissive power to a firm expectation could be claimed to underscore Flood Re’s duties in this regard, I believe that there is sufficient clarity in Flood Re’s role to manage the transition to risk-reflective pricing and for that to be achieved through the current drafting of the Bill.

Turning to Amendment 156E, from my noble friend Lady Parminter, I can confirm that it is, as she said, our firm intention that the policy will be reviewed every five years by the Government. This review will assess the level at which the levy and the eligibility thresholds are set to ensure that the policy objectives of Flood Re continue to be delivered, including the transition to risk-reflective pricing. The plan will be a public document and Parliament will be able to use existing powers to call Flood Re’s staff to answer any questions. On the point made by the noble Lord, Lord Whitty, in the case that Flood Re’s finances are out of kilter or the scheme is not operating effectively, that review will be brought forward. We are working with the ABI to define this process. The amount of the levy and the thresholds will be set out in secondary legislation. We intend those instruments to have a review period, always accepting that they might be reviewed early if circumstances require it. In addition, as I have just said, we are taking a power to make Flood Re’s responsible officer directly accountable to Parliament for the scheme’s value for money and for propriety and regularity. There are powers to require Flood Re’s audited accounts to be laid before Parliament and provided to the Comptroller and Auditor-General to examine and compare against Flood Re’s published transition plan.

I now turn to Amendment 156F, which would require the Flood Re scheme administrator to set out how it intends to manage the transition to risk-reflective pricing by investing in flood risk mitigation measures. Actions taken by households, communities, businesses and Government to reduce flood risk are the best and most cost-effective way to secure affordable insurance for households at risk of flooding in the long term, and I recognise the noble Lord’s intention to see this reflected in the Bill. As I said earlier, Flood Re will have a duty to have regard to the need both to act in the public interest and to ensure economy, efficiency and effectiveness in the discharge of its functions. It may well be that the Flood Re administrator decides in due course that investments of the sort that the noble Lord would like to see present an appropriate means of complying with these requirements where there is a clear case for doing so. Nothing in the Bill precludes this. However, we think that it is important for Flood Re to retain flexibility in the way that it discharges its public-interest duty and plans for transition, in order to ensure that it is in a position to balance these requirements against its core obligations as a reinsurer. Accordingly, we do not think that it would be appropriate to mandate Flood Re to subsidise flood risk mitigation measures.

Finally, Amendment 156G would limit the maximum proportion of the cost of a claim that an insurer could reclaim from the Flood Re scheme to a specific amount, as part of the Flood Re scheme’s management of transition to risk-reflective pricing. I understand that the intention is that this would restore an element of risk-reflective pricing to insurance policies in Flood Re. This could create a financial incentive for households and insurers to put in place the necessary measures to manage their flood risk. However, price is one, but not the only, signal to households for achieving that and our proposals for ensuring that households have the necessary information to make informed choices about managing their risk should also act to drive resilient behaviours. While superficially attractive, sharing an element of the risk between Flood Re and households would also have the effect of creating a more complex system to administer, thereby adding to the overall costs of the scheme. Having listened to what I have said, I hope that the noble Lord will be prepared to withdraw his amendment.

[Lord Krebs]

My Lords, I thank the Minister for those comments in response. Above all, my amendments are about trying to put risk communication and management at the heart of Flood Re; we have heard that in relation to previous amendments earlier this afternoon. I am pleased to hear from the Minister that this is indeed the Government’s intention. I look forward with great interest to seeing how that develops through to the next stage of the Bill.

I also thank other noble Lords who have taken part in discussion of these amendments. On the frank feedback of the noble Lord, Lord Whitty, on my lecturing skills, in Oxford we normally do that anonymously. This was non-anonymous feedback on my lecturing skills in explaining risk sharing; I will take that away and consider it for the future. In the mean time, however, I beg leave to withdraw the amendment.

--- Later in debate ---

Moved by

[Lord De Mauley]

157: Clause 54, page 109, line 30, after “persons” insert “, or descriptions of persons,”

[Lord De Mauley]

My Lords, I take this opportunity to draw noble Lords’ attention to government amendments tabled to Clauses 54, 70, 72 and 80. These are generally minor and technical amendments but I draw your Lordships’ attention to two areas which may be of particular interest.

Amendments 162 and 163 concern the winding up of the Flood Re scheme under Clause 70 and the distribution of any reserves. As part of the operation of the Flood Re scheme it is expected that Flood Re will build up capital reserves. These reserves would contribute to the payment of the scheme liabilities including flood insurance claims for those households whose premiums have been ceded. It is expected that these reserves will be reduced over the life of the scheme and taken into account as part of the five-yearly levy-setting discussions. At the end of the scheme, Flood Re will still hold some level of residual capital reserves. Clause 70 allows for an order to be made requiring a specific amount of those reserves to be transferred to the Secretary of State upon closure of the scheme.

These amendments require that, in preparation for closure of the scheme, the Secretary of State must consult the Flood Re scheme administrator in relation to the transfer of any reserves, as defined for these purposes. This consultation must be carried out before an order requiring the transfer of reserves can be made. As drafted, this consultation duty will apply only at the end of the life of the Flood Re scheme and will not extend to any other circumstances. Because of this, I ought to mention that I may need to come forward with a further amendment in relation to reserves on Report.

The other area of interest relates to Clause 72 on internal drainage boards. This clause amends Schedule 3 to the Land Drainage Act 1991 to simplify the process by which internal drainage boards in England may seek to make organisational or structural changes. At the Welsh Government’s request, Amendments 164 and 165 extend Clause 72 to internal drainage boards and internal drainage districts in Wales. This will align the process throughout England and Wales. I beg to move.

Amendment 157 agreed.

--- Later in debate ---

[Lord Whitty]

My Lords, I think my noble friend Lord Campbell-Savours is going back to a point that I raised earlier—namely, that the Flood Re parts of the Bill may have been produced relatively late in the Commons. However, the dividing line between what is included in terms of property and what is not is not as clear as it should be. My noble friend has just identified a group for whom this issue is particularly confusing, but in any case the distinction is not in the text of the Bill. As I said earlier, there is slight confusion about the various bits of paper that Defra has produced on this matter, so we need clarity one way or the other as to which groups are included and which are not. We have heard various bits of clarification from the Minister today. I think that most of those should end up in the Bill before we finalise it and I look to the Government to come forward with amendments on Report or at Third Reading to make sure that the position is clear.

I am afraid that I confused the amendment of the noble Lord, Lord Shipley, in this group with an amendment in an earlier group and commented on it earlier. However, whereas I have great sympathy with a lot of the other excluded groups, I have virtually none with those who built on and developed land in high-risk areas after 2009 because it was already clear from the previous agreement between the Government and the ABI that new insurance would not be given for those developments. Like the noble Earl, Lord Cathcart, I do not think we should give those people leeway retrospectively. If we shift the deadline now, somebody will argue for a deadline at a later stage to allow yet more development in inappropriate places, and that will skew the insurance figures and the whole calculation behind Flood Re. Therefore, I do not support the noble Lord on this occasion.

[Lord De Mauley]

My Lords, my noble friend’s Amendment 160A seeks to make all houses built and occupied before its introduction eligible for Flood Re. This amendment would move the cut-off date for inclusion of properties in the scheme to the start of Flood Re, rather than from 2009, and would also bring band H households in scope of the scheme.

I apologise to noble Lords as I suspect that I may be repeating what I said earlier today and, indeed, we may repeat it yet again later. First, I reiterate why we intend that properties built before 1 January 2009 and those in council tax band H and the equivalents would not be eligible for the scheme. However, before I do that, I shall respond to my noble friend Lord Shipley and a number of other noble Lords who asked what state the property must have been in at 1 January 2009 in order to qualify. It must have been in possession of a council tax band, which would imply that it was habitable at that date. I hope that is helpful.

The 2009 cut-off date recognises that new housing development should be located to avoid flood risk, or where development in a flood risk area is necessary, it should be designed to be safe, appropriately resilient to flooding and not increase flood risk elsewhere, in line with the national planning policies in place. This date therefore reflects the fact that homes built since 2009 should already be insurable at affordable prices. As the noble Lord, Lord Whitty, said, that marker has been in operation for several years, and it has been maintained under the Flood Re proposals.

The noble Lord, Lord Shipley, asked about surface water mapping. The new mapping has shown that the total number of properties affected by surface water flooding is lower than previously thought.

Band H properties are not included in the scheme because, as I explained in some detail earlier today, Flood Re is designed to target support to those who need it most.

The noble Lord, Lord Campbell-Savours, raised the issue of leasehold properties. As we have discussed, commercial policies are out of scope of Flood Re, which is designed to support households. We believe that this approach is fair and practical, and it was supported in the public consultation. However, the leasehold sector presents a more complex situation, where the contents policy is classified as domestic, but a buildings policy could be classified as either commercial or domestic and could cover multiple dwellings. As I said, I recognise the strength of feeling on this issue, particularly in light of the ongoing extreme weather conditions, and I feel we need to take time to consider it in more detail, although, without evidence of market failure, it would be difficult to justify action. However, we will examine the evidence further with the ABI and I hope to provide an update on Report.

[Lord Campbell-Savours]

Will the Minister comment on the issue of share of freehold?

[Lord De Mauley]

If I may, I will include that in that consideration. I hope that my explanations have provided some helpful reassurance. I am happy to ask my officials to work with the ABI to set out the proposed scope of Flood Re in more detail before Report, as that is something noble Lords have asked for. On that basis, I ask my noble friend to withdraw the amendment.

[Lord Shipley]

My Lords, I thank the Minister for his helpful reply. A Written Statement would also be helpful as we move towards Report. I should like to pursue two points briefly. I say to the noble Earl, Lord Lytton, that there is more than one narrative but the outcome is the same. The issue is whether the understanding of flood risk that was apparently correct in 2008 and 2009 is still correct in 2014. I suspect that it is not, which is why I am concerned. It would be helpful if the Minister’s note that he will send before Report could inform us whether it is still correct.

The noble Lord, Lord Whitty, said that we should not include in the provision those who had continued to build on high-risk flood plains after 2009. I entirely agree with him, but that was not the point I was making. My point was slightly different—namely, that I think the definition of what is high risk is now changing around us. Therefore, people who bought in good faith properties which were not in a high-risk area may now find that they are living in a high-risk area as a consequence of climate change, changing weather patterns and so on.

We have had an interesting debate. The issues have been identified and we can consider them further prior to Report. Therefore, I beg leave to withdraw the amendment.