Flood Defences

Debate between Lord Gardiner of Kimble and Earl of Kinnoull

Thursday 1st December 2016 Lords Chamber

[The Earl of Kinnoull]

My Lords, I am grateful. I declare my insurance and farming interests as set out in the register of the House. Does the Minister agree with me on two points? First, Flood Re is very much in its start-up phase—it began trading only in April this year, and 53,000 policies is, in insurance terms, not very many—and the concept will really be proven when the first claims are successfully settled and paid. Secondly, once that is done, however, it would be sensible for the Government to engage the relevant parties in conversation about extending the concept of Flood Re—which is different from Flood Re itself—to small businesses, which I think would be greatly to the benefit of this country.

[Lord Gardiner of Kimble]

My Lords, I am conscious of the noble Earl’s experience in the insurance industry, but it is fair to say that Flood Re is financed to cover up to £2.1 billion in claims. To give a sense of scale, that is seven times worse than the flooding in 2007. I hope that the BIBA product will advance further understanding of how best businesses, and small businesses in particular, can avail themselves of what the noble Earl described: a Flood Re-concept policy.

Flooding: Defences

Debate between Lord Gardiner of Kimble and Earl of Kinnoull

Tuesday 8th November 2016 Lords Chamber

[Lord Gardiner of Kimble]

My Lords, that is precisely why—as set out in the letter I wrote and the Environment Agency paper Winter Ready 2016—the Environment Agency is extending flooding-warning service to more communities and improving the range of digital services on GOV.UK, to help people take action to minimise the impact. I very much hope the noble Lord will think of going to the meeting on 29 November, when the Environment Agency and other departments will be in Parliament so that all these matters can be discussed in more detail.

[The Earl of Kinnoull (CB)]

My Lords, will the Minister provide the House with an update as to whether Flood Re, the insurance solution which can provide affordable insurance for homes, is a success in its first year of operation, and what plans the Government might have to extend Flood Re to small businesses?

[Lord Gardiner of Kimble]

My Lords, the first thing to say is that 53,000 home insurance policies are now backed by Flood Re. In fact, 40 insurers representing 90% of the market are now participating in Flood Re. I am very pleased that the insurance industry has responded so enthusiastically. We want to see how that works first. It seems to be extremely successful. It has meant that policyholders have reasonable premiums. We will certainly look at any future issues.

Flood Reinsurance (Scheme and Scheme Administrator Designation) Regulations 2015

Debate between Lord Gardiner of Kimble and Earl of Kinnoull

Tuesday 27th October 2015 Grand Committee

[Lord Gardiner of Kimble (Con)]

My Lords, I am pleased to introduce the regulations necessary to implement Flood Re. The increasing sophistication of flood risk modelling employed by insurers, in combination with expected increases in extreme weather events, means that many households in high flood risk areas increasingly struggle to afford insurance. We are seeking to address this: Flood Re will ensure households in high flood risk areas are protected from spiralling insurance premiums and excesses over the next 25 years.

Flood Re is a responsible, proportionate approach to the challenges of flooding, which can be devastating to those affected. However, there are many different aspects to reducing the terrible impacts of flooding on people; Flood Re will form just one piece of the UK’s flood risk management. Many others must play a role in managing flood risk, including householders themselves, local authorities and landowners.

There are two sets of regulations to be debated today—first, the funding and administration regulations, which set out the framework within which Flood Re will operate and how the levy will be calculated. They outline the technical aspects of the scheme. Secondly, the designation regulations, which designate the scheme and administrator and enable the Flood Re scheme to begin operation. These draft regulations were subject to extensive public consultation and were developed by working closely on the detail with specialists from the Association of British Insurers, the Lloyds market and the financial regulators.

It is important that the regulations are debated now in order that Flood Re can sign contracts with individual insurers this autumn in preparation for becoming operational by April 2016. Flood Re will need to be authorised by the Prudential Regulation Authority before it can operate. The financial regulators, and the insurance industry, need certainty about the legislative framework within which Flood Re will work before authorisation as a reinsurer could be given. The financial regulator’s authorisation process is ongoing. We will check with the Prudential Regulation Authority that Flood Re’s application is still being considered as part of that authorisation process before signing the regulations. Although the financial regulators cannot provide a definitive statement on the likelihood of authorisation, this will provide an indication that the application is progressing.

Flood Re will be principally funded by a levy raised from relevant insurers, as defined in these regulations. The amount of each insurer’s levy will be based on its share of the UK home insurance market. The total primary levy to be raised from insurers will be £180 million, which we are assured reflects the level of cross-subsidy currently present in the market. Given the unpredictable nature of flooding and Flood Re’s solvency requirements, we have also provided powers to raise additional levy from insurers if it is needed.

The regulations set out constraints that Flood Re needs to operate within as the levy is expected to be classed as public money by the Office for National Statistics. Flood Re will operate independently as a normal reinsurance company regulated by the financial regulators. Because of its unique position, Flood Re is being set up as a bespoke arm’s-length body.

Flood Re will be directly accountable to Parliament. The regulations stipulate that Flood Re is required to lay its annual accounts before Parliament. Flood Re’s responsible officer will be accountable to Parliament for the financial propriety and regularity of the scheme. While Defra will remain accountable to Parliament for general policy matters relating to flood risk management, there will be no role for Defra’s Ministers or accounting officer in Flood Re’s day-to-day management.

While Flood Re is publicly accountable, it is owned and operated by the insurance industry. Flood Re will be required to manage itself within the normal requirements for regularity, propriety and value for money, and full parliamentary accountability. Flood Re will be audited externally. However, the National Audit Office will also be able to conduct value-for-money reviews of any of its activities, and report on them to Parliament.

The regulations set out that the prices that insurers may pay to cede policies to Flood Re, which we call the premium thresholds, are payable by insurers according to council tax bands. Benefits are targeted at the lower council tax bands and it is hoped that they will be passed to policyholders. The regulations require that Flood Re review the scheme, including the level of the levy and premium thresholds, at least every five years. Any changes to the levy would require amendments to the regulations via the affirmative resolution process. Defra’s Secretary of State may call a review of Flood Re at any point.

Flood Re will publish a transition plan within three months of the regulations coming into force. We expect this plan to indicate how prices may evolve during the life of Flood Re, and the measures that Flood Re may take to incentivise people to do more to manage their own flood risk. However, Flood Re, like all reinsurers, will only be permitted by financial regulation to carry out the business of reinsurance. Flood Re’s directors also have to be able to fulfil their prudential and fiduciary duties according to company law and financial services regulation. UK flood management depends on a complex arrangement of interweaving policies and interested parties, of which the insurance industry and Flood Re form only part.

In conclusion, I remind your Lordships why Flood Re has been established. We all recall the floods which many have experienced in recent years. Flood Re will provide the people of the United Kingdom with available and affordable flood insurance in a way that supports and complements wider efforts to reduce and adapt to flooding. It is expected that between 350,000 and 500,000 households at high risk of flooding will benefit from the Flood Re scheme. Flood Re has made significant progress, appointing its board and senior executive team ready to be considered for designation and authorisation by the financial regulators. These regulations are a significant step in the direction of helping people to manage the impact that flooding can have on their lives. It is for these reasons that I commend these regulations to the 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?