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Good afternoon. We will now hear oral evidence from the Association of British Insurers, the National Flood Forum, the British Insurance Brokers’ Association and the Council of Mortgage Lenders. Before calling the first Member to ask a question, I remind all Members that questions should be limited to matters within the scope of the Bill, and that we must stick strictly to the timings in the programme motion the Committee agreed to. I hope that I do not have to interrupt mid-sentence, but will do so if need be. Please would the new witnesses introduce themselves to the Committee for the record?
New clause 1(1)(a) establishes that the Flood Re scheme will apply to household premises only. The Government have confirmed that there will be no legislative intervention for the provision of insurance to small and medium-sized enterprises. Is this approach justified? I know that there are slight differences between insurance policies for commercial premises and those for private premises, but is this justified?
Aidan Kerr: The first thing to say is that over recent years we have built up a compelling body of evidence from our members and other sources, finding that there is a systematic problem in the UK for households. We think there are around 200,000 households that could struggle to get affordable flood cover in a free market. We simply do not have the same evidence basis for SMEs in the same period. There are some reasons for this. The main reason is that in comparison to the household market—which is very much a mass market, very much a homogeneous, standard product—SMEs tend to have more of an individual relationship with brokers, and tend to have their insurance designed for their specific needs.
The obvious point is that there are much fewer SMEs than households, but it is also the case that their products are designed for them, and so there is much less of an affordability issue with SMEs. That is not to say that there are not places which we have seen in the media that have struggled, but Flood Re is not the solution for SMEs anyway, in the ABI’s view. Flood Re is predicated on affordability and on judging affordability according to a council tax band, which is not perfect but is good enough for households. You do not have that same ability to judge what is affordable between one SME and another SME, and they will have all sorts of different needs depending on the type of business they are, the stock they hold and their business interruption needs. We will monitor the market over the coming years to see if an issue emerges, but even if it does, Flood Re just is not the answer for SMEs.
I understand that they are included under the statement of principles. Is there a case for small companies to be included under some flood insurance scheme?
Aidan Kerr: As I say, it may be that a flood insurance scheme of some sort can be developed that could incorporate SMEs, but their insurance needs will vary widely from one company to another even though you may categorise them in a similar way. The evidence is not there at the moment that this is a national issue for SMEs. There is a national issue for households, which is why we are proposing the national framework of Flood Re. The same does not exist for SMEs, which is why this industry would not be willing to support SMEs being in Flood Re, and nor do we think it would make sense for them to be in it.
As a supplementary question, if somebody is living above business premises, and their private residence is above a business, is there a case for including them in an insurance scheme?
I hear what you say with regard to business premises being very different from domestic premises, but the Federation of Small Businesses is certainly concerned that very small businesses that have affordability problems are not covered in any way. While they clearly do not pay council tax, they do pay business rates. Is there no system that you could sensibly look at, based upon rateable value, which will enable you to introduce a similar system? You also say that you have absolutely no evidence of any problem of insurance for very small businesses. That seems a little unlikely.
Aidan Kerr: A few months back, we commissioned the Oxera consultancy firm to look at how something like Flood Re could be extended to SMEs. The conclusions from that work were shared with the Federation of Small Businesses, who at the time were saying “They actually get that.” What I am not saying is that there are no problems for any SMEs in the country. Clearly—we saw it in Todmorden last year, we saw it in Cockermouth high street—there are places where SMEs may struggle because they live in that particular high flood risk.
What I think I am saying is that a national intervention such as Flood Re is not appropriate for SMEs because we just do not have the evidence for SMEs. Actually, when the Government went out to consult on Flood Re they asked for evidence of it; there are anecdotes from various groups, but again there is no evidence that says that this is a national scale issue.
Aidan Kerr: Over the coming years we will monitor the market to see both how the market adjusts to Flood Re being implemented and how SMEs adjust to a free market. If evidence emerges then that suggests that there is more of an issue than we think, we would work with Government and the broking community. Most of this is actually sold through brokers, so there could be scope for a broker-led solution in this—I don’t know. If that evidence develops, at that point we could think, “What is the solution to this issue?” What we do know now is that Flood Re cannot be the solution for them because the framework is just not set up for SMEs.
If I may, I shall move on to the proposed exemptions, which will clearly be in delegated legislation. At the moment, the proposal is really in three areas. One is band H and beyond, and I believe the logic for that is that they should be able to afford and obtain a property insurance. You then have the group that is post-2009 construction, which is related to historic evidence. Then you have the category of genuinely uninsurable, and that is a very interesting phrase which seems to require a great deal of thought as to definition and interpretation.
Will you clarify for me why those three? Do you believe now that all three are right and justified, and should there be others which have perhaps been put forward which the Government have not taken forward as other exemptions?
Aidan Kerr: Maybe it is easier to cover those in reverse order. Genuinely uninsurable is an interesting one, which we have looked at over the last three months. I think that this is a principle that our chief executives wanted in there—that Flood Re cannot be something that is opened up to properties that just cannot get insurance now. We pushed back to say, “This isn’t something that we are able to track, because how do you define what is uninsurable as opposed to somebody who cannot afford insurance?” We have looked at this, and so what we are proposing now is that Flood Re has no concept of genuinely uninsurable.
Households can use Flood Re; there is no condition, apart from those other exclusions, that says they cannot use Flood Re. What will then happen is that Flood Re will build up some data which shows the extent to which those houses flood over the next five or 10 years. It will be able to start working out, in a more productive way, which households flood very frequently—twice in five years, three times in 10 years, or whatever that might be. You can then think, “What’s the solution for those households?” So “genuinely uninsurable” is not something that is being proposed in the framework for Flood Re. That is the first thing which I think should be quite good news.
On the 2009 development point, my view, and the view of the ABI, is that inappropriate development is clearly the biggest risk for flood risk in this country. The Government have stated their intent in terms of flood defence investment, which we very strongly welcomed. But on the other side of it, where the properties are built, is, I believe, the single biggest driver behind increasing flood risk. We need to have something in here that states very clearly that this is sorting out a legacy issue; it is not providing a framework to incentivise inappropriate development. So the 2009 cut-off was put in place for good reasons in 2008, at the last revision of the statement of principles, and we feel that that should be kept in place for 2009.
Would you clarify why 2009 was thought to be the right cut-off date? Secondly, some towns and cities are on floodplains, so when you talk about ensuring that properties are not built where there is a problem, some towns, villages and even cities would not have any development and I do not think that is realistic.
Aidan Kerr: The cut-off of 2009 was set because the statement of principles was revised in 2008 and we need to think back to the year before, 2007, when the floods hit. That set off some intense work in all sorts of aspects of flood risk, not least in developing a better understanding of all sources of flood risk: not just rivers and the sea, which the Environment Agency had a good handle on, but surface water through flood maps. That was the start of finding a way for local authorities to have a better understanding of which areas were at risk of flooding, regardless of the source.
That is why 2009 was set in place: because it was the first time that we had some understanding of surface water flood risk. That is a complex area. It will develop over the next 25 years and even then we will still need to make more improvements to our understanding, but that is broadly why it was set then. For me, the issue with amending that is that that would send a message that every time it is reviewed, it will be amended. Part of the Flood Re framework is to have five-yearly reviews. We are keen that the message on this is stern; 2009 was a valid cut-off date when the final incarnation of the statement of principles was agreed and that should stay in place now.
Paul Smee: I think that, given that this is a clear-cut debate, the risk may have to be priced into any mortgage offer, but at least the lender will have some clarity in their mind: they will know the status of the security on which they are lending. In some cases, that might cause some difficulty, and it will certainly cause a pricing issue, but there will be clarity.
Mr Kerr, do you foresee individuals with houses built after that time having trouble getting any insurance at all? Will the problem be simply about cost, or might it be in obtaining insurance?
Aidan Kerr: The first thing I would say is that, without this restriction, the number of properties that have been built in an inappropriate place would have been dwarfed by the potential inappropriate development that could take place if that was to be allowed in Flood Re. For those people whose properties were built in such areas, and particularly those that have been built against Environment Agency advice, the answer will be “a mixture”.
People with properties that have a 20% or greater chance of flooding in any given year may find it hard to find insurance at all, because most insurers will think that there is not an economic business case to write cover. Others who have, for example, a one in 50 chance of flooding will probably be able to find insurance, but that will be increasingly priced at a risk basis. If it costs about £30,000 every time your property floods and you have a one in 50 chance of flooding in any given year, for the flood element you are probably looking at £1,500. That is a very simplistic calculation, but there will be a mixture of some who will find it hard to afford the home insurance because of where they live and those who cannot find it at all because the insurer cannot offer it at an economically viable price.
I hear two conflicting messages from what you just said. I understand that some properties will not be able to get insurance, yet when we talked about the genuinely uninsurable, you said that at this point they would be covered and then you would look at the information year on year.
Aidan Kerr: The “generally uninsurable” relates to those properties built before 2009. We are saying that for the existing, pre-2009 issue, there is no way of defining “genuinely uninsurable” because you cannot split that from people who find it hard to afford insurance. Pre-2009, there is no concept of genuinely uninsurable for Flood Re. Post-2009, there is a mixture of those who will find that they can get insurance but that that is quite expensive and others for whom insurers cannot offer an economic price.
Paul Cobbing: It certainly does and we think it is slightly more complicated than that, because within that category there are properties which were given planning permission before 2009, but which were built after 2009. There are also those which may have been built in perfectly reasonable circumstances, but which, because of growing development or changing weather patterns, have become a flood risk. The third category is properties where we did not have an understanding of what the flooding risks were at the time. Aidan mentioned surface water as being a particular example and we have a new set of surface water maps due to come out next week, which will be the first fully comprehensive maps.
So there are groups within that post-2009 category who you could argue would be unable to get insurance or to get it at a reasonable price through no fault of their own. I can offer a suggestion. We need to ask for proposals of how we are going to deal with those categories: we could do it either through an arbitration panel or some other mechanism that will allow us to identify those people who have truly not chosen to go and live in a flood risk area in the full knowledge that they are in a flood risk area post-2009—it is not their problem.
This sounds to me both urgent and important and not something we can just leave, because in my experience of flooding and water locally in the south-west, you would land up with a big fight about who is actually responsible: you have the home owner, the Environment Agency and the rest.
Graeme Trudgill: Talking about a mechanism to help those people who cannot actually find insurance, we have one in place for other difficult, defined areas in insurance services, called signposting, where perhaps older drivers or older travellers going on holiday cannot access insurance. Since we launched a scheme with the support of Government and the ABI last year, we have helped nearly 100,000 motorists and travellers of older age to find cover.
We think that if property owners who are having difficulty accessing flood insurance are signposted to the British Insurance Brokers Association, a not-for-profit trade association, we would be able to find a home for the majority of those policies that are rejected by insurers. So, if a particular insurer does not want to insure someone because it is perceived as too high risk, then if it comes to us, we have brokers who have schemes that can insure, typically, 95% of those rejected by the insurers, which is the vast majority. If you sign up for the Environment Agency flood alert systems and you are prepared to put in place air brick covers when the warnings come, then we can work with most policyholders to find insurance for them. That would be a good mechanism to help those people who are having difficulty accessing insurance and are not covered by Flood Re.
Graeme Trudgill: I think that the last time we looked there were about 14,000 who were very difficult, but they did not sign up to the Environment Agency flood alert system and were not prepared to do anything to help their property. Therefore, we were not able to convince the underwriters to cover it. We are keen to work with policyholders so they can try to get cover. There are lots of flood insurance products now in place and the National Flood Forum advertises as well, so that, even if people live in the very highest risk area, they can get these things and we can find a way to insure them in specialist markets.
Obviously, we are all trying to grapple with all the new clauses that have gone down, but bringing in the point from Anne Marie Morris, I will take Mr Kerr right back to this issue about those who are uninsurable. As I understand it, you are saying that it is a theoretical exercise at this point. As I read it, new clause 13 provides a review and an appeal. My assumption is that this relates to those people who may emerge in the future. Is that your understanding of these clauses?
Aidan Kerr: I think the review and appeal thing relates to the flood insurance obligation first of all, rather than to Flood Re. I might be wrong about that, but if you have been assigned into the area—that is, the scope for the flood insurance obligation rather than for Flood Re—then you can appeal about that inclusion. I might be wrong, but I think that is what that refers to.
What I am saying about the genuinely uninsurable properties is that when we agreed the memorandum of understanding in June, one of the principles that our members said they wanted to have in there was this concept of, “Well, if something is genuinely uninsurable, Flood Re shouldn’t be able to help it.” We went away and thought, “Well, how would you define that?” and our conclusion is that, actually, there is no fair way of defining that. Therefore, for the purposes of Flood Re, other than the other exclusions around 2009, bands H and I and SMEs, there is no concept of genuinely uninsurable.
I therefore take it that there is no mechanism at the moment for someone to appeal against being classed in the future as uninsurable?
Aidan Kerr: What Flood Re will seek to do is that, if you have homes that flood very often and they are in Flood Re, Flood Re will start to generate the data that show which properties will flood most often. What Flood Re will then try to do is to say that when you have your repair work done the second time, third time, or whatever it is that Flood Re defines as the number of times within a certain period of time that you flood, you will need to have resilient repair done, or we will have to work with the home owner to get resilient repair done, and only through doing that will you continue to have access to Flood Re.
It is important to know that Flood Re will be a reinsurer for the insurance company, and by law the insurance company cannot insist on that customer having resilient repair work done to their property—that has to be the customer’s choice. But if Flood Re is setting out that you will no longer be able to get access to Flood Re if you do not have that resilient repair done, that is the way that Flood Re can incentivise the right sort of behaviours.
I have to say that I sort of share the concerns of Mrs Morris. You appear to be saying on one hand, Mr Kerr, that there is no such thing as an uninsurable property, and then you promptly set out the series of steps that lead to someone being uninsured. So, which is it?
Aidan Kerr: Well, we are saying that in order to be included in Flood Re when it begins in June 2015, there is no concept of a genuinely uninsurable property. The second thing we are saying is that once you have properties in Flood Re, we will want to find a way of making sure that resilient repair—that action that owners can take for themselves—is put into the process. So, if a property floods quite frequently in a short period of time, Flood Re would seek ways of ensuring that that property owner takes action to reduce not only the cost of flooding of that property but the amount of time they spend outside that property. So, I am not saying that, once Flood Re starts, “genuinely uninsurable” will become a concept. I am saying that once Flood Re starts, it will be able to use the data it holds to advise customers on how they should repair their property to make them less susceptible to flooding in the future.
Okay. As I understand it, there are no clauses that will allow an individual to appeal against being classed as uninsured, but the Minister may provide clarity when he speaks later. First, is that the panel’s understanding as well?
I think that Labour Members are surprised by that. So what would you propose if Parliament was minded to introduce some sort of appeal mechanism? How would the panel suggest that is done? Should it be the Financial Conduct Authority? Should it be Ofwat? Who does the panel think is an appropriate appeal body?
Graeme Trudgill: The FCA already has a rule that says the insurance industry has to treat a customer fairly, so I think we already have that regulator. We probably would not suggest we have any more. It is probably best if it would fall within the FCA’s remit, as it already has that duty upon us to treat customers fairly.
As I understand it, some time post-2015, a person initially—if we are all on the same side and on the same argument—complains to Flood Re if, for whatever reason, Flood Re has decided that it no longer wants to insure them, meaning they are uninsurable. If, funnily enough, the person does not agree, what is their recourse, so that Flood Re does not simply get to chuck people overboard, if you will pardon the pun?
Aidan Kerr: I suppose the issue we have is that you could set up Flood Re as just a pure financial mechanism and nothing else, but I do not think that any of us thinks that that is doing it justice. If Flood Re is truly to work, it has to contain some mechanism whereby, if properties are extremely high risk, customers are incentivised to do something to change the way their property is repaired. You either do that, or you think, “Okay, if they do not do it, there have to be some repercussions, ” so if they are not taking action themselves—if they are not agreeing to resilient repair, for example—they may not have access to Flood Re. It seems slightly conflicting with that objective to then say that there should be an appeal process to allow a home owner who has not taken action for themselves still to have access to Flood Re.
At the risk of hogging the time available, I think the point is that Flood Re has taken somebody out of Flood Re and made them uninsurable in the scenario that you have talked about. I think all Members of Parliament have had casework with various bodies where the public body, if I can call Flood Re that, takes a decision on the corporate level that does not reflect the particular circumstances. I genuinely have a concern that we are providing no mechanism where it is possible that Flood Re has made a mistake.
Could you just clarify this, perhaps, in language that we all understand? I have a case where somebody was flooded. They were told that they could go 10 years flood free, and they would then be able to get insurance. Basically, they were flooded again nine and a half years down the road. That does not mean that they will not be able to access Flood Re, because their historic flooding record means that they will be treated the same as everybody else at the beginning and they can enter the scheme. Am I correct?
If that person was flooded two years later and they did not do any remedial work to prevent future flooding, and then in 12 months’ time they were flooded again, you would say that, eventually, if it was a trend, they would actually fall into the category of genuinely uninsurable.
If I can continue: basically, if somebody is constantly flooded and they do not carry out the repairs to their property or provide any remedial work, there is no need for an appeals procedure, because you have genuine, real-time evidence. If you have genuine evidence, it is very difficult to appeal against that, so there is no need for a costly body to conduct an appeals procedure where there is genuine evidence. Am I correct?
Aidan Kerr: Yes. In the first case, that person would have access to Flood Re. That is the first thing to say. As an aside, even if that person floods twice in 10 years, they could still be at a low risk of flooding. They may just have been unlucky. Once they are in Flood Re, what I am saying is that you have the unique ability to work with that person and to think, “How can we work to make this experience much less unpleasant for you next time it happens?” You are trying to work with the customer, but if it keeps happening and they continually refuse to have work done that would make them more resilient to flooding in the future, there may be some things that Flood Re can do to incentivise that. We have not developed anything like how that process would work, but Flood Re has the potential to try to drive that behaviour once it has the data on people and how often they flood.
I am curious to know whether the panel is concerned that, under the proposals in the Bill, the Secretary of State will be able to bring forward details of the flood insurance schemes via secondary legislation, which would bypass adequate parliamentary scrutiny.
Aidan Kerr: From the insurance industry’s perspective, in an ideal world, we would like to have seen more detail in the primary legislation simply because it gives the industry more clarity about how it would work. The insurance industry are not renowned for being wild risk-takers. They would rather have as much certainty as possible about how this stuff works. But we are also realists. We know that the MOU was signed at the end of June. Between the end of June and now has been a short amount of time to get the clauses put together. In an ideal world we would like to see more detail, but we can understand why the Government have taken the approach of having quite a high level at the primary stage, leaving more of the detail to the secondary stage. But we think there should be sufficient scrutiny at that secondary stage because that will be very important.
Paul Smee: I would agree with the previous speaker. It is always a very fine balance to strike between me sitting here and saying we want more on the face of the Bill and me sitting here and saying that you build in inflexibilities if you put things in statute. Possibly the way through is to ensure that there is adequate consultation and scrutiny of these draft regulations before they come into force.
Just two quick questions and if you want to put your answers in writing afterwards that would helpful. Going back to the earlier points about the post-2009 category and the band H, it would be helpful to get something in writing about what you believe the costs would be if Parliament were to extend this. I think both sides of the Committee would find that helpful. Secondly, I have talked to the ABI about this previously and I know it was working on the figures and I am sure it has just forgotten to give them. I understand there are figures floating around of the estimated number of households affected in the four nations of the United Kingdom. I appreciate that you have not done it by water companies but you have done it roughly by nations. Could the Committee have those figures? If you have broken it down any further I am sure the Committee would welcome that information as well.
Aidan Kerr: Yes, we can look into that. On that second point, the reason why we have not shared the information yet is because we are doing another data collection of our insurers which will give us the most up-to-date analysis of what households will get put into Flood Re. Once we have that, which I think will be the end of December or early January, we will certainly send it through, if that timing works.
We would accept that these are rough figures and we will not hold you to them. But the Committee would find it helpful to get an understanding of how many properties are affected. I suspect, looking at colleagues on the other side of the Room, that if you had figures for, say, the south-west, it would help many Members and equally figures for the north-east of England too.
I am slightly concerned. You seem to be thinking about flooding incidents in terms of individual properties and modifying individuals’ behaviours so that they put up better flood defences. But with climate change and our experience, especially in Wales, of large-scale catastrophic floods such as those at Towyn, will we be facing such events into the future which would, forgive the use of the term, swamp any reinsurance scheme?
Aidan Kerr: The basis of all of the parameters that we have designed Flood Re around, restricting new build, having as part of the discussions the absolute need to make sure that there is targeted flood defence investment, alongside the need to have something that incentivises people to take action for themselves, means that we are taking more of a holistic view of flood risk than just property by property by property. Flood Re can be adjusted to take account of climate change. As we have seen over the last decade we have had so many more flood events than compared with the previous decade. Some of the climate change predictions suggest that that will become more and more frequent.
Flood Re has been designed in such a way that you can make changes to it. You can adjust the various premises in Flood Re to take account of climate change. So if it starts to look as if flood risk is much worse because of climate change, Flood Re can adapt accordingly. It should be a comfort to people who live in areas at risk of flooding who used to be at moderate risk but are now at significant risk because of climate change, that Flood Re will be in place for the foreseeable future to protect them from the increasing risk of climate change.
I am concerned that there are some places where it is not economically viable to build proper flood defences, because the capital value of the properties that might be flooded is so low, such as individual rows of houses in country areas. I am concerned that they will never be able either to be safe from floods or to insure their properties so that they can get some recompense if the worst happens.
Paul Cobbing: We are doing quite a lot of work, for example, through the Department for Environment, Food and Rural Affairs flood resilience community pathfinder scheme to explore different ways to get community involvement in delivering flood risk management, rather than flood defence. That is using the full range of measures to help with that.
We also need to think of this measure as an opportunity. If we keep on at the current rate and come to the end of the 25 years, we will actually be in the same position as we are now, in terms of numbers of houses that are still at flood risk, given increasing population, changing weather patterns and so on.
We must use this as an opportunity to engage much more effectively in a collaborative and partnership-based way, including the insurance industry. That is why the public benefit aspect of Flood Re is really important, so that we can maximise the opportunity to have flood risk management and increase the scale of its operation. The danger is that, if we do not, we will be sitting back here again in the future. We have got to see it very much in that light. We will obviously actively participate in trying to take those measures forward.
The Environment Agency flood maps are produced by a technology that I think is called LIDAR. As I understand it, there is a difference in accuracy between some of the maps. Indeed, insurance companies produce their own flood maps as well. What criterion will be used for those who will benefit from Flood Re and those who will not? Which map will be used?
Aidan Kerr: Actually that is one of the key benefits of Flood Re: no map will be used. The criterion for whether you are deemed by the industry to be at high flood risk is if you have to pay an insurance premium above a level deemed as affordable. If there are a dozen different insurers using different mapping approaches, and 11 of them result in a premium above that threshold but one, with more sophisticated mapping and approaches, comes up with a premium below that, that person will take the business and you do not go into Flood Re. It is a way to ensure that Flood Re reflects the market’s understanding of flood risk, rather than rely on the subjective issues with one type of mapping. The Environment Agency uses LIDAR, which is very accurate, but when that is taken in and put with the other methodologies you get the flood risk for an area of land—
Aidan Kerr: Precisely. So they will not rely on that because that will not give you an understanding of the flood risk of a property, just for the area of land in which the property sits. That is why Flood Re is more dynamic than some of the other solutions that came up over the past two or three years, because it does not rely on one single source of mapping and modelling technique.
Just following on with that line of questioning, how easy will it be for the consumer? My scenario is that I am looking to buy a house and want to check whether the property is going to fall into Flood Re. How do you envisage a member of the public being able to check that, if there is not going to be a map that you can look at?
Aidan Kerr: I guess, to be honest, I have not really thought about that. I suppose the current ways to do it would be to have an envirosearch report when they buy a house, or to look at the Environment Agency website. As you say, that would not necessarily translate to going into Flood Re.
I would say that Flood Re collects data for claims. In addition, the insurance industry more widely has committed to share claims data with the Environment Agency. That will help to inform the Environment Agency’s maps and help make them more accurate. At the moment there is no way to see if their property would or would not go into Flood Re. I suppose they could call up and get a quote from an insurance company for their property. For a customer, all they would know about whether their property is in Flood Re is that they would have a range of quotes from different insurers to choose from, because the Flood Re element would be between Flood Re and the insurer, if that makes sense.
But surely, if you are a potential house buyer, it is not unreasonable that you would want to know. It strikes me that Flood Re has got all these data and knows whether my property or Mr Williams’s property is on the register. Forgive me for asking the question, but is not the solution for someone to access or to do a search through Flood Re? They can say, “I am thinking about buying this property. This is the postcode or the street, and Flood Re holds the data.” Is not that the simplest way of taking this forward?
On the overall principle of the scheme, if the scheme gets going and there are not any major floods in the first year or two, I suspect the fund will build up and it will be quite resilient. What happens if—I hope this does not happen—there are major floods in the next year or over this winter? How robust will the scheme be? Will you be straight back to the Government with your hands out saying, “Let’s have some more money”?
Aidan Kerr: Okay. If that happens, it is envisaged that Flood Re will buy commercial reinsurance, and our work on that assumption at the moment is that you would buy commercial reinsurance to cover an annual loss of between, say, £250 million and £2.4 billion. The £2.4 billion is our initial assessment of what a 1 in 200 year would look like. So Flood Re will have income from the premium and from the levy, but there is a chance that you have a flood that exhausts that income and you have not got enough money to take it to your reinsurance threshold. If that happens, the industry has agreed to provide the funding to Flood Re, so insurers will provide the funding to Flood Re to allow Flood Re to then pay the claims back. So that is the industry saying it is happy to provide short-term funding to allow claims to be paid.
Aidan Kerr: I’m used to it; it’s fine. The idea is that the industry will be fine to provide that. It is important that the industry is able to provide that funding to Flood Re in a way that does not cause volatility to its profit and loss accounts. We believe we have come up with a proposal that can achieve that and that works for Government as well. The memorandum of understanding sets out that as long as the funding is temporary and you can get the money back from Flood Re in the good years, that will be fine.
One final question. As far as affordability is concerned, you are absolutely convinced that under this scheme you will not price people out of the premium. It is all very well saying you will insure them, but if you are going to insure them for £1,000, £2,000, £10,000 or whatever, that is not affordable insurance.
Aidan Kerr: No, and this scheme hardwires affordability into it, because you have the affordability set according to council tax bands. That is not perfect, but it is the best available approach to have a proxy for ability to pay. It is not only that the premiums will be affordable for home owners who live with flood risk; the excesses will be set at a level as well. So there will be a standard excess of £250 under Flood Re, and that should prove to be extremely good news for home owners who worry about having £10,000 or £20,000 excesses.
Aidan Kerr: I guess this is one of the reasons why we have fed back through this consultation process as we have. The simpler Flood Re can be made, the better, because that will incentivise insurers to use it. The premium thresholds will be set according to what is affordable. They will be set for the foreseeable future, and the excesses that Flood Re offer will also be standard.
Paul Cobbing: It is really important to say that of all the mechanisms that have been proposed over quite a long period, Flood Re is the one that addresses affordability more than the others. Secondly, there will nevertheless be people—the Joseph Rowntree Foundation has done some work on this—in council tax bands A and B, and some even in band C, who are basically still income-poor, capital-rich within those parameters. There may be people who cannot afford those.
I think we also need to be clear that in all these exemptions and exclusions, there are people who are going to be outside this, and we need to target resources—in this case, the lead local flood authority role in flood risk management and co-operational partners—to identify who those people are, improve their flood risk management and effectively create a mitigation. There may not be high numbers, but we need to know what those numbers are, and we need to be able to intervene. Flood Re is the best model that we have available, but there will still be some people outside it.
Mostly, insurance premiums, if there is not a big flood risk, will be linked to the rebuilding costs. You could have a relatively small property on a low council tax band, but because it is a listed building, or because of the particular materials that it is built from, it would have a high rebuilding cost. How does Flood Re deal with that situation?
Aidan Kerr: If you have a property such as that, which has a particularly high rebuilding cost because it is a different type of property, first, there are more specialist insurers out there who can help out with such property. In terms of how Flood Re deals with it, it really is going to be up to the insurer to know whether they are going to cede that into Flood Re or not. So regardless of the type of property, if they see that the flood risk element of that property is going to be above a certain level, that property gets ceded into Flood Re.
Regarding the interesting discussion about bandings—forgive me, but we are coming into this slightly blind—what happens if there is a rebanding exercise at any point? I see straight away that there seems to be some amusement from the panel. What will happen if a property currently is not in band H, but there is a rebanding process and it finds itself in band H? Would they find themselves falling out of Flood Re?
Paul Cobbing: This is slightly tangential, but I have had some correspondence with some of my colleagues in non-governmental organisations in Scotland and elsewhere who have concerns to ensure that the bandings that are used in those countries that are different from our own tie in effectively with the pricing of premiums and excesses. They are keen to ensure that there is a mechanism. Certainly, that is something effective if it is analogous.
Paul Cobbing: As I understand it, the Scottish and Welsh Ministers have been talking to DEFRA and the Treasury. The Scottish flood forum, which is a charity that we created earlier this year, has been talking to me, and I have had discussions elsewhere about, “So what does it mean for Scotland? Our banding rates are different. How does this apply? How do we ensure that the default bodies have consulted properly?” That is the nature of the discussions.
Can I take that a little further? It is not just that it might not be comparable between England and Wales, but Wales went through a rebanding exercise some years ago, which was then abandoned as far as England was concerned. You might see large-scale changes in England, but not similar changes in Wales, hopefully at least, because the rebanding exercise was—[ Interruption. ] Thank you. It was a disaster in some ways. Many properties were wrongly placed, and the appeals process was protracted. Ultimately, it was successful for many property owners. That is more of a comment, I am afraid.
Graeme Trudgill: Our view is that actually, we do not believe there should be an exclusion for band H. A little old lady who has inherited a big house cannot necessarily afford to pay a big insurance premium on her own, so we think that maybe the simplest thing is to let everybody apply, and then rate the premiums accordingly.
As we are mining into the detail—as my colleague said, slightly blindly—can I ask about residential park homes, which are typically in places susceptible to flooding? I am thinking of properties on the riverside and so on. It is typical for them to be placed near floods. They are homes to many people. Will those homeowners be at a disadvantage?
Paul Cobbing: As I understand it, they are covered by separate and specific insurance policies. That brings up the SME question. Micro-businesses have been talked about. There are small-scale private landlords who are not covered by the scheme, there are the camping and caravan sites that you just mentioned and there are flats covered by management agreements. Those are all different aspects of the SME mix, as well as micro-businesses.
At the moment, micro-businesses covered by a council tax band are included in the scheme, but all the others are not. Our view is that for reasons of flooding and many other policy reasons such as fuel poverty, it should be a legislative requirement that private landlords should have insurance that includes flood risk insurance, as many do not. On SMEs trading in the community, the issue for us is that the impact assessment has been done on national lines, but for many communities, networks and community economic resilience are the issue. Because the impact analysis is done on national lines, evidence has not come forward about the impact on SMEs. It is not the individual businesses per se that are the issue; it is the wider community, and we need the evidence. For the Committee, it would be a useful exercise to all of us for that evidence to be gathered.
To return to Mr Docherty’s point about a change in council tax banding, property values change all the time, and most insurance policies are based on property value. If we had something rigid on the face of the Bill about council tax bandings, surely that would not give you the flexibility to change policies as time went on.
It is only the flood element of an insurance policy that we are talking about, is it not? We are not talking about any other elements. It is a small part of the policy cover.
Aidan Kerr: Yes. The flood part of a policy cover will obviously depend on the household’s risk of flooding. The council tax band basis is the most readily available proxy for ability to pay, but one of the things that I will take away from this session is that we need to make sure we have processes in place to ensure that council tax banding, which is dynamic, can deal with flood, and that the process does not suddenly leave a property high and dry, if you will pardon the phrase, because it happens to have been reclassified from band G to band H. That is certainly something we will put into the implementation work on flood.