Lord Sheikh’s Speech in the House of Lords on the Water Bill – Second Reading
My Lords, I commend the Government on this most important piece of legislation. Through the Bill, we are able to address a number of issues, and I believe it will improve the health of both our economy and our environment. It should also reduce water bills for consumers in the long term. It is clear that our water industry is in severe need of reform. Greater investment in our water and sewerage systems is long overdue, and greater levels of competition, efficiency and innovation are needed.
I will focus on Part 4 of the Bill, which relates to flood insurance. At this juncture, I declare an interest as chairman of an insurance broking and financial services organisation. I have been a director and the regional chairman of the British Insurance Brokers’ Association. I support the policy objectives of the Government on this issue and broadly support the measures contained in the Bill, for reasons I will go into in due course. I am particularly pleased that the insurance industry and the Government have been working closely together on this. Indeed, we must all work together to try to help facilitate a solution that will make affordable flood insurance available to UK property owners, including small businesses, in the long term.
Flooding is the greatest national threat that the UK faces, and the risk is rising. In recent years, this increased risk has been reflected in the number and cost of major flood events that property insurers cover. In the 1990s, there were two flood events with a claim cost of more than £150 million for insurers. In the first decade of this century, there were five such events, including the 2007 floods, which cost insurers £3 billion. The 2012 floods saw insurers paying out approximately £600 million.
A significant number of government amendments were made to the Bill in the other place, particularly on flood insurance. That was to be expected, given that in the first printing of the Bill the flood insurance provisions were set out in the broadest possible way. These new amendments set out the Government’s proposed legislative approach and are included in Clauses 51 to 71 of the Bill in its current form.
I welcome the fact that Flood Re will effectively limit what most high-risk households should have to pay for the flood component of their home insurance. Although the current statement of principles agreement ensured that viable flood insurance was available, it by no means guaranteed affordable prices for consumers and has long distorted the insurance market. However, the statement of principles ensured that the Government continued to spend on flood defences, where for every £1 spent, £8 is saved in claims.
I am sure that the clarity for those customers whom Flood Re will cover will be most welcome. Prices will be set according to council tax bands so people will know the maximum that they could be asked to pay. Moreover, it seems perfectly fair that those who are in smaller properties should not have to pay as much for flood insurance as some of those in larger houses. Support would be targeted at those who need it most, and the level of excesses charged by insurers controlled. The fact that the levy on all home insurers that will be used to fund the scheme in addition to insurance premiums comes within the pricing structure of the market means that most ordinary home owners will not face any rise in bills. Spreading risk across policyholders is a widely used model for insurance. Even with the possibility of a top-up levy being required in the early years of the scheme, it is envisaged that the overall effect will be neutral over time.
However, for those excluded from Flood Re, there continues to be genuine concern about both the availability and affordability of flood insurance. Some criticism has been levelled at the Government for these proposals based on the fact that Flood Re will not cover houses built after 2009. A cut-off date is needed to maintain a signal to planning authorities that all developments must be appropriate and resilient to flooding. However, a 2009 cut-off is unnecessary, as policy planning statement 25 has been in force since then. There is not a significant number of properties that have been built in flood-risk areas since 2009. These have been subject to planning policy statement 25. An alternative cut-off date of 2014 would mean that home owners in flood-risk areas would get the protection they need without materially affecting the ability of the scheme to deliver its objectives.
The importance of resilience when it comes to flooding must not be understated, for in some areas it is virtually impossible not to build on flood-prone land. With this in mind, I believe that more thought should be given to “uninsurable” properties in this scheme. It is inevitable that the risk that some properties would carry would make them unsuitable for Flood Re, but we must do all that we can to ensure that “uninsurable” properties are not left behind.
The Flood Re proposals have been broadly welcomed by all parties, although inevitably there are some concerns. One such concern has been that small businesses will be ineligible for Flood Re and therefore be afforded less protection than in the statement of principles by which they are covered. It is clear that the risks for businesses are different and that financial risk is often much greater.
The fact that small businesses could be in a worse position than before is a cause for concern to the Federation of Small Businesses, the British Property Federation, the National Flood Forum and the British Insurance Brokers’ Association. I am pleased that in Committee in the other place the Minister there clarified that small businesses were covered if they were based in council tax-paying residential properties. However, this will be for only a tiny minority, as most businesses will be registered in a company name and Flood Re excludes businesses if the insurance is taken out in the name of the business.
Figures from the Federation of Small Businesses show that, in 2012 alone, one in five small businesses was affected by flooding, highlighting just how important for such companies the availability of affordable protection is. I ask my noble friend to comment on whether he believes that small businesses will be suitably protected by Flood Re and, if not, what provisions have been made to ensure that they can continue to access affordable flood cover.
Judging premium costs based on council tax boundaries is a reasonable approach. There has been mixed reaction to the exclusion of band H properties, with some claiming that their inclusion would have little impact and others claiming that the effect will be greater. However, I ask my noble friend how the differential pricing in the system was designed and, more importantly, do the Government believe that the current proposals are robust enough to help those on lower incomes, particularly those who may live in band H homes who are asset-rich and cash-poor?
The ultimate goal of Flood Re is to pave the way for a smooth transition to the free market. If that were successful, it would be most welcome, but, of course, that is not an easy feat. No country in the world has a free market for flood insurance which successfully preserves widely available and affordable flood insurance for those at high flood risk without some form of government involvement. With that in mind, I seek further explanation from my noble friend on how the transition in the insurance sector from the cross-subsidy being formalised in Flood Re to an eventual free market will be managed.
Moreover, what, if any, safeguards will be in place to ensure that premiums do not rise considerably once a free market is established? I look forward to my noble friend’s answer on that issue. Although a contingency plan in the form of the flood insurance obligation is being legislated through the Bill, I know that from the industry perspective there is strong feeling that that must be avoided. Perhaps that is not a bad thing, because it makes the incentive for Flood Re to work even greater. However, there are real concerns about placing an obligation on each insurer to take a proportionate share of high flood-risk households. The obligation would be the first time that insurers were forced to provide a type of cover to a high-risk home owner-occupier who they otherwise might have chosen not to cover.
Although the obligation would force insurers to compete with each other for the business of high-risk households in order to meet their targets, there is a danger that could make some insurers withdraw from the market, reducing capacity, competition and choice, and resulting in increased prices. I believe that there is a risk that this measure, intended to help customers to shop around, would in fact limit their ability to do that very thing. It could also negatively affect those at low flood risk, as insurers seek instead to compete for high-risk properties in order to fulfil their quota.
Having said that, I welcome the measures in the Bill, but I believe that more needs to be done for those currently excluded from the scheme: in particular, small businesses such as those we have seen mopping up their small shops and offices around the UK in recent months.
Throughout the process of taking forward the Bill, it has been recognised that in some ways we have made good progress. We have been able to develop proposals as far as we have only through a partnership approach. This has seen a considerable compromise by the insurance industry and a significant future commitment from the Government. I am sure that for as long as that continues, we will be able to secure a system that is fit for purpose.