Flood Re Insurance Scheme

Thérèse Coffey Excerpts

Tuesday 6th December 2016 Westminster Hall

[The Parliamentary Under-Secretary of State for Environment, Food and Rural Affairs (Dr Thérèse Coffey)]

It is a pleasure to serve under your chairmanship, Mr Hollobone. I thank my hon. Friend the Member for Carlisle (John Stevenson) for raising the issue of access to affordable flood insurance and the Flood Re scheme. For those at high flood risk, whether households or businesses, or indeed community leaders and their surrounding communities, this matter is a central one.

I would also like to thank other hon. Members for their interventions. I hope to address them all during my response. The anniversary of Storm Desmond—we had Storm Angus last week—is a timely reminder that the potential for flooding, and the devastating impact it can have, is never far away. It is worth reflecting on the purpose and value of Flood Re, which replaced the statement of principles—a series of agreements made by the Government and the insurance industry since the 1960s on the provision of insurance to those at flood risk.

However, the statement of principles had limitations. Under the statement, members of the Association of British Insurers agreed to make insurance available to domestic and small business properties in areas that were not at a significant risk of flooding. For properties in significant flood risk areas, the statement of principles provided an offer of cover only to existing customers, provided that plans were in place to reduce the risk within five years. There was no availability of cover for those most at risk if they had not historically had flood insurance or the risk was not being reduced. Importantly, the statement of principles did not provide for the affordability of flood insurance.

[Tom Tugendhat (Tonbridge and Malling) (Con)]

Will the Minister give way?

[Dr Coffey]

I would like to make some progress and then I will happily hear from my hon. Friend.

In the insurance industry, traditionally there has been an informal cross-subsidisation of the costs of flood risk, which is a common approach to managing risk in the insurance sector. However, commercial pressures and the availability of more sophisticated flood risk models have given rise to a trend towards insurers increasingly assessing local flood risk and imposing risk-reflective terms. Without Flood Re and with an immediate transition to fully risk-reflective prices in a free market, many households at high flood risk in the UK would probably experience a significant increase in their insurance premiums in the coming years. I therefore welcome the comments made by my hon. Friend the Member for Maidstone and The Weald (Mrs Grant).

[Tom Tugendhat]

I draw attention to my entry in the Register of Members’ Financial Interests. As my hon. Friend the Member for Carlisle (John Stevenson) elucidated, the Flood Re scheme has gone some way towards supporting communities, individuals and housing that is vulnerable to flood risk, but it is clear from the original legislation that it does not work in isolation. It works alongside flood defences not simply as a repair product but as part of a structure to build confidence in housing and industry in flood-affected areas. Will the Minister say a little about the flood protection the Government are introducing and how that will defend communities, particularly in areas such as the Medway?

[Dr Coffey]

I certainly hope to come on to that. To return to the genesis of Flood Re, the Government, working with the insurance industry, established the scheme to help householders at the highest flood risk who were blighted by not being able to access affordable insurance. It is expected to help about 350,000 households. Flood Re not only limits the price of flood insurance according to council tax band but limits the excess to £250. It ensures that all home insurers in the UK are part of the solution. It is a complex scheme, but it is a world-first and it is the fifth biggest reinsurance scheme globally and the second largest in Europe. There is much international interest in what we are doing.

Flood Re is providing relief for thousands of householders at flood risk and brings real practical and emotional comfort to many, as has been said. Fifty insurance companies, representing more than 90% of the market, now offer access and in its first six months of operation 53,000 households have benefited. This portfolio will build as the market matures, with Flood Re policies expected to grow in number over the next three years. I encourage hon. Members to advertise that to their constituents. Nevertheless, it is worth emphasising that a number of factors beyond flood risk determine any insurance quotation and it remains important for householders to shop around for the best deal.

[Julian Sturdy (York Outer) (Con)]

I agree with the Minister and my hon. Friend the Member for Carlisle (John Stevenson) that the Flood Re scheme is a good one and has been successful, but does the Minister accept that there is more to do for businesses, particularly small businesses, in flooded areas such as York and Carlisle? When flooding hits, it has a huge impact on small businesses. Will she consider extending the scheme to cover businesses?

[Dr Coffey]

I intend to address that issue towards the end of my contribution. If I do not manage to do so in sufficient detail for my hon. Friend, I will be happy to have further discussions.

I stress that Floor Re is a transitional measure. It was designed with a 25-year lifetime to help householders at high flood risk to adapt to risk-reflective pricing. That sets the challenge of how collectively as a country we can bring down the risk and impact of flooding over the next 23 years. The Government are spending record amounts on flood defences, with a £2.5 billion six-year capital floods programme, which will provide better protection for at least 300,000 homes. My hon. Friend the Member for Tonbridge and Malling (Tom Tugendhat) will be aware of some of the protections, and I know that he is pressing for more for his constituents.

There is a growing understanding that, regardless of our significant investment in flood defences, a residual risk of flooding remains. Flood defences are not always appropriate, and where they are we have seen that they can be overtopped in extreme events, as happened a year ago. We need to work across the whole catchment area to slow the flow of water through natural flood management and to prepare for any flooding that does occur. As well as ensuring we have a first-class emergency response to flood events, there is much we can do to adapt our homes and businesses to become more resilient.

Only last week, I visited Warrington and saw at first hand a new flood defence scheme at Victoria park where work is still in progress. Back in 2013 and within two weeks of the first phase being built, the scheme prevented 200 properties from being flooded. That was fantastic for the residents, but reminds me of the need to help people to understand the residual flood risk that inevitably remains. It is important to take measures to try to stop water entering a property and to speed recovery. Returning home is increasingly important and relatively simple steps can make a big difference—for example, flood resistant air-bricks; raising sockets; and using tiles instead of carpet. Property-level resilience can play a significant role in making people and their property less vulnerable to the physical and mental impacts of flooding.

A few months ago, we published the Bonfield property flood resilience action plan in collaboration with the commercial sector. It explores how collectively business and Government can best enable and encourage better uptake of such measures for properties, including businesses, at high flood risk.

Turning to leaseholds, particularly long leaseholds, I have commissioned my officials to look at the nature and extent of the problems that my hon. Friend the Member for Carlisle described, as we need to look at them in more detail. He will be aware of the wider issue of small leasehold property, to which he referred. The insurance industry regularly informs us that for, the most part, affordable commercial insurance and contents insurance for individual leaseholders is available through Flood Re, but there are examples of individuals and leasehold properties with more than three residential units struggling to access affordable business insurance. Likewise, there are examples of residential buy-to-let properties not being covered and owners finding it difficult to obtain insurance.

Evidence is building and the challenge is not easy. Much consideration was given during the creation of Flood Re to whether to include leasehold properties. From a practical perspective, insurers determine whether an individual property is at high flood risk on a household-by-household basis and can allocate the cost using a simple domestic insurance model. For leasehold properties, buildings insurance will often cover numerous dwellings, which may well have different levels of flood risk. It would be difficult to establish a consistently fair approach to how lessees should cover that risk.

There are also considerations of principle. With Flood Re, when the insurer has a direct relationship with the homeowner, the competitive market gives us confidence that the benefits provided by the scheme will reach the households for which it is intended. It is not clear that a similar scheme for leasehold properties would achieve this.

I have been saying for some time that there is good news. I am very pleased that yesterday the British Insurance Brokers Association announced the launch of a new commercial product designed to help small businesses at high flood risk to access affordable insurance. The scheme will also be open to leasehold properties. It will no doubt help some, and I hope it will help the vast majority of those who are struggling. On tenement housing in Scotland I was not aware of the difference in application, and I will certainly ask my officials to add to that. Should there prove to be a need for additional action, I remain open to exploring what can and should be done.

I have great sympathy with what my hon. Friend the Member for South Ribble (Seema Kennedy) said and I am happy to explore it further. There is a similar challenge, in that that is not quite as straightforward as individuals’ domestic dwellings, but let us look at it and see.

Flood Re is not a panacea. There is no evidence of a systemic problem, but I recognise that there is a real problem for the individuals, businesses and communities involved. I am particularly concerned about smaller businesses that cannot easily move premises. I hope that using granular postcode data and recognising the benefit of property level resilience measures, the new products from insurers—as of next week, I believe—will enable more small businesses to obtain affordable insurance.

In parallel, the Department for Environment, Food and Rural Affairs is working to understand the nature and extent of the problem. I thank the hon. Members who have shared examples with me and encourage businesses to work with us to help the Government to have a more comprehensive picture of the challenges that they face. Where there is a clear need for further action, the solutions are varied. Extending Flood Re to cover businesses is not possible, because the scheme is predicated on a domestic rather than commercial insurance model. Equally significant is the question of who pays to subsidise profit-making businesses, which are often more able to move premises than households.

My hon. Friend the Member for Carlisle asked about Flood Re and the ongoing concern. Flood Re will be reviewed every five years. It needs to be given time to work, but there are separate policy questions that we need to look at with regard to scope. Flood Re will continue to interpret legislation and I assure hon. Members that we are in regular contact on it.

People should be aware that Flood Re does not extend to properties built during or after 2009. Planning law means that properties built in a high flood-risk area should already be resilient to flooding. Extending Flood Re to cover these properties would only incentivise unsuitable development. That is why we have not done that.

[Mr Andrew Smith]

Will the Minister, as part of her ongoing review, review the level of premiums that are charged under the British Insurance Brokers Association scheme in relation both to leasehold properties and to those of small businesses? The danger of a finely targeted, granular approach is that some may find the risk premium unaffordable.

--- Later in debate ---

[Dr Coffey]

The right hon. Gentleman will be aware that the principle of using taxation to support citizens is well established. The principle of forcing businesses to subsidise one another is not established and would be a significant difference.

The product is coming out formally next week and we need to see how it works. There are other models that will be encouraged and this might help the community centre to which my hon. Friend the Member for Carlisle referred to think about adding extra insurance against the excess, if that excess is deemed to be too high to manage without additional protection.

I urge hon. Members to make sure that their constituents are aware of the Flood Re scheme and the benefits it can bring. I encourage hon. Members to make sure their constituents are flood aware and prepared for flood events. That could be signing up to the flood alert service and making properties more resilient. Touch wood, Mr Hollobone, I hope that we do not have an incident similar to Storm Desmond last year. However, we are not relying just on touching wood. I praise the Environment Agency for all its work in the last year, working alongside councils to make sure we are better prepared for this winter. I assure the House that this Government are committed to continuing to protect hundreds of thousands more homes in the coming years.

Question put and agreed to.