Flood Reinsurance (Scheme and Scheme Administrator Designation) Regulations 2015

Lord De Mauley Excerpts

Tuesday 27th October 2015 Grand Committee

[The Earl of Kinnoull (CB)]

My Lords, I apologise for being a minute or so late for that very eloquent introduction. Before welcoming these statutory instruments, I declare my interests as set out in the register, in particular the fact that for several years I was head of the division within the Hiscox group which wrote United Kingdom household insurance and for some years the CEO of the reinsurance company at the centre of the Hiscox group, which wrote many reinsurances of the players in the United Kingdom household insurance market.

These regulations are an excellent example of co-operation between the Government and the industry. It is not the first example, of course. There was one in the early 1990s when, following the two dreadful explosions in the City of London which caused immense damage and in which lives were lost, Pool Re was formed. Pool Re has been a success for the UK insurance market and the UK insurance industry.

It is worth pausing for a moment to consider the UK insurance industry. I am afraid that it is not at the glamour end of the financial services of the City, but it is a very strong industry and in a leadership position in the world. The London and international insurance and reinsurance markets alone account for gross written premiums of around £60 billion a year. The industry employs about 50,000 highly specialist staff, and it is this expertise in insurance and reinsurance which has come together with the Government to structure what is today Flood Re. Will the Minister join me in saying that there is much to congratulate the UK insurance industry on, in its world leadership and its strong, centuries-old reputation for consistently paying valid claims?

Flood Re provides the availability and affordability of flood insurance for flood-prone homes. We have at Hiscox lots of computer systems which can cause artificial floods on a computer screen. You can see just how many homes in recent times have become flood-prone. This is due both to planning policy and to geographical and climate changes. Essentially, the bet has become too big to place with the private insurance market. There are many examples of catastrophe insurance around the world which have become too big for the private markets. Flood Re represents a singularly appealing way of getting around the problem.

As we have heard, the scheme is aimed at 500,000 out of the 25 million or so homes in Britain, so quite a large number of homes are involved in it. On review, I feel that it is simple, secure and sensible. Will the Minister confirm something slightly different in terms of the review process, which is that it is the intention of the Government, particularly in the early years, to review progress of Flood Re and, if necessary, tweak matters to optimise the scheme?

[Lord De Mauley (Con)]

My Lords, I am grateful to my noble friend the Minister for explaining the regulations. I welcome the fact that the Government are not only putting in place a system that addresses both the availability and affordability of flood insurance—the statement of principles did not do this—but delivering significant levels of investment in flood defences through their historic six-year capital settlement. They are therefore tackling the problem of flooding at both ends, providing homeowners and communities with greater certainty in the years to come.

Protecting people from the emotional and financial hardship caused by flood damage is extremely important. After years of negotiation and with Flood Re now established, we are moving towards making this a reality and protecting people from spiralling insurance premiums. The benefits will be targeted at lower-income households to promote affordability for those least able to pay. Excesses, which can often be in thousands of pounds, will be limited to £250.

The country is investing in flood protection at record levels, with an unprecedented six-year commitment of £2.3 billion following £3.2 billion of spending during the last Parliament. This will see 1,500 flood defence schemes constructed, improve protection for an additional 300,000 homes and reduce overall flood risk by 5%.

Although I have no doubt that the noble Baroness, Lady Jones, will have some questions, because that is her role, I am pleased that the large number of antagonists who faced me from all sorts of angles during the passage of the Bill are, as evidenced by their absence today, apparently satisfied.

[Baroness Jones of Whitchurch (Lab)]

My Lords, I can see that I am going to have to try to make up for them in one go.

I am grateful to the Minister for setting out so clearly the intention of the regulations. In essence, the schemes as outlined in the Water Act have our broad support. Families living in high-risk flood areas have found their lives blighted both by the flood risk and the worry of unaffordable or unobtainable insurance, so we are pleased that the Government have taken steps to work with the industry to find a solution.

However, your Lordships will not be surprised to hear that I have some remaining concerns. First, there is the timing of the regulations. The Bill was passed early in 2014 and the latest consultation on the detailed proposals took place later that year. It is now October 2015, with another winter imminent. It seems that the expected start date has slipped, with Flood Re now saying that it expects to go live next April. Is the Minister happy with this latest timetable? What does that mean for householders facing another winter of threatened floods in the coming months?

Also, from my reading of the regulations, even if we pass them today, the FR scheme administrator will need to be regulated by the relevant financial regulators, which I think that the noble Lord confirmed. This will take time to set up. Then of course Flood Re is saying that it needs to carry out extensive testing. Can the Minister guarantee that householders will be able to have the additional peace of mind that this scheme aims to offer by the April 2016 deadline? From what he was saying I understood that it was not possible to give that guarantee until the regulators have had time to scrutinise the scheme in detail.