Introduction
Good afternoon and thank you to the National Flood Forum for inviting me to be with you today.
The title of today’s conference could not have been better chosen.
What the future of flood insurance will hold for consumers, businesses, the Government and insurers is something on the minds of a great number of people. And the title “Fighting Flooding” is especially appropriate.
Because insurance is not the problem. Flooding is.
And how we as a country manage the increasing flood risk is a key question for the future.
Flooding represents the biggest natural catastrophe risk in the UK. And the floods of 2007, where the insurance industry helped 185,000 customers get back on their feet and paid out almost £3 billion, showed us all the devastating impact flooding can have on peoples’ homes, families and livelihoods.
When I took on the role of Head of Property Insurance at the ABI, I think it is fair to say that we enjoyed a constructive but sometimes tense relationship with the National Flood Forum. But by working together to understand each other’s positions, I think we have galvanised around a common view. And that is the need for action – not more words - from Government in terms of agreeing what the future of flood insurance looks like when the Statement of Principles expires next year.
The Statement of Principles
For those of you who may not be familiar with this agreement, it was signed in 2000 between the ABI and the then Government and has been renewed a number of times since. Most recently in 2008. Then the industry made it clear that the agreement could not be renewed again when it expires next year. The agreement has obligations on both sides. Insurers commit to continuing to provide
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flood insurance to as many homes as possible and the Government commit to investing in flood defences, providing flood data to insurers, and delivering a robust planning system.
The agreement was never designed as anything more than a temporary sticking plaster to allow successive Governments to organise and fund a more appropriate, sophisticated and sustainable long-term solution.
The Statement of Principles is not good for insurers. It distorts the insurance market by allowing new entrants to cherry pick low flood risk properties giving them a key competitive advantage. And it inhibits innovation as there is no commercial incentive for insurers to create a specialist high flood risk insurance market.
But it is not good for consumers either. Customers in low flood risk areas are subsidising the premiums of those at high flood risk. And those who are at high flood risk often find themselves stuck with their insurer. This means they are unable to enjoy the benefits of what should be a highly competitive property insurance market.
The Statement of Principles isn’t a suitable model for the future. And in any event, it doesn’t guarantee access to affordable insurance. A fact that I’m sure many in this room might testify to.
So the Statement of Principles will end on 30 June 2013 and it will not be renewed.
The ABI’s proposals
The insurance industry is not alone in wanting to see a framework put in place that provides a more sustainable model for the future.
Indeed we have already heard similar calls this morning from the National Flood Forum, the Morpeth Flood Action Group, the academic community and others.
But we are running out of time to make sure that people in high risk areas are properly protected from the devastation that flooding can cause.
My reassurance to you today is that the insurance industry is determined that consumers should continue to have access to affordable flood insurance when the Statement of Principles expires next year.
We have considered whether a free market could work. Of course it would. But not for the most at risk consumers. It may seem slightly odd for a trade association to be arguing this, but a free market would be a dangerous path to go down. Based on data provided by ABI members, we estimate that in a free market, up to 200,000 properties around the UK will struggle to access affordable flood insurance.
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And this would not only threaten consumers’ resilience to flooding by being able to purchase insurance to manage their risk, but also the mortgageability, saleability, and ultimately the value of their property as well.
You don’t want that to happen. I don’t want that to happen. And the insurance industry doesn’t want that to happen.
So we have dedicated significant resources to developing models to ensure those households at greatest flood risk continue to have access to the insurance market.
The latest proposal we have developed has a number of similarities with the Morpeth model presented earlier. It will deliver widely available flood insurance through a pooling mechanism. Insurers will continue to manage most flood-related claims – helping people to get their lives back together following a flood. And entry into the scheme would be set at an agreed threshold.
There would be no significant change to the way customers access insurance and a more competitive and innovative insurance market should emerge over time.
And the model allows for something that I know is particularly important to people in this audience and to Government – the ability for property-level resistance and resilience measures to be taken into account by insurers.
Naturally the devil of any model is in the detail and that it where the difficult decisions lie.
Unfortunately, the Government has misunderstood our proposals. So it is worth me highlighting what the model does not do.
The model does not provide a subsidy to the insurance industry. The support that is required from the Government goes to assist customers, not insurers.
The model does not subsidise everyone at flood risk regardless of their wealth. Rather, it allows for support to be graded. There are many ways that this could be achieved. None is perfect. But it seems to us that thinking about council tax bands is a good place to start. You know as well as I do that floods don’t discriminate. So for the Government to focus solely on low income households, neglects the fact that a substantial number of middle income families are at significant flood risk.
And the model does not come with a new and unsustainable burden placed on the taxpayer. Naturally, how the Government chooses to provide the support necessary for the scheme is up to them, but it could easily be funded by a small and formalised contribution from those purchasing home insurance. And it would need to have a Government guarantee in case the pool is emptied by a huge event like the floods we saw in 2007. However, if the contributions are set at the right level, the Government could expect to recoup this money over time – a key consideration given the challenges facing the Government’s finances.
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Need for action from Government
The reality is that no country in the world provides universal flood cover, including high risk homes, without some form of Government-led support.
The insurance industry wants to continue to provide flood insurance to as many customers as possible, but it cannot continue to provide cover at prices which are uneconomic for our members.
So the work that we have done is to develop an option that is practical, affordable and deliverable. But crucially, it provides help to those who need it most.
So what is the next step?
I cannot stress strongly enough the urgency of the Government reaching an agreement with the industry on the approach that it wishes to take.
Whichever model is ultimately adopted will take time to implement. Legislation is almost inevitably required, IT changes to insurers’ systems will need to be made and we will all need to work together to explain to people what the new system is and does.
The Statement of Principles expires in just over fifteen months. The clock is ticking. Every day lost in 2012 when we are not working together on the implementation of a new flood insurance model, is a day in 2013 when customers may struggle to access affordable insurance.
Can we really wait for another update statement from the Government in the Spring?
The answer is no. But we will all need to do the best we can in the time we have.
Consumers and businesses already face so much uncertainty in the current economic climate. They don’t need the added uncertainty of whether they are going to be able to obtain flood insurance on their home or office next year.
Conclusion
In conclusion, the question posed by this conference is: what will the future hold for the provision of flood insurance?
The short answer is, I don’t know.
What the insurance industry wants to see is a future where those at risk of flooding are protected.
A future where the insurance industry charges customers fair and risk-reflective premiums.
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And a future where a Government support mechanism exists but it doesn’t impose an unsustainable burden on the taxpayer.
We’ve put an option on the table that delivers on all three.
What we all need is action from the Government.
And I genuinely believe that Caroline Spelman and Richard Benyon are committed to finding a solution and are working hard on doing so. They both entered politics to improve things for UK citizens and to make a difference.
I want to work with them to help them deliver on that ambition.
And I am sure you do too.
All of us need to work constructively with the Government. We need to understand each other’s positions, tackle the difficult issues and hammer out a way forward.
All of us have the same end goal in mind. All of us want to see a sustainable, affordable and long-term solution delivered.
And we all have a lot of work to do together to see that goal realised.
Thank you.