As reports rage of an impasse between the Government and the insurance industry on negotiations over the future of flood insurance, the question on everyone’s lips is “where do we go from here?”
Don’t be fooled by the recent wintry drop in temperature; we started with the wettest April on record earlier this year and promptly moved into the wettest summer. Even if there are lulls in the rainfall, there is a wealth of evidence that weather patterns are changing and that surface water flooding is an increasing problem.
Sleeves were rolled up last week after Nick Starling, an ABI director, broke the ABI’s silence on commenting on the discussions between the industry and the officials, attacking the Government and saying that negotiations had reached a “crisis point”. The BPF followed up by expressing its deep disappointment over the Government’s rejection of proposals put forward by the ABI.
So what are those proposals and why the urgency now?
For the past 12 years, there has been an agreement in place between the Government and the ABI in which the insurance industry committed to providing flood cover for domestic and small businesses as widely as possible whilst, in return, the Government committed to ensuring that flood risk is appropriately managed and that long-term commitments were made in order to reduce flood risk (known as the Statement of Principles). That agreement comes to an end in June of next year, prompting insurers to review their method of assessment on flood risk.
The solution put forward by the insurance industry involves a not for profit flood levy similar to the Pool Re model used for insurance against terrorism. Broadly, property owners would contribute a low levy for flood insurance which would be pooled to create a fund that would be used to provide universal flood cover across the country. The sticking point is that in the early years the fund would not be able to cope with large-scale flood damage along the lines of the 2007 floods and so the industry is seeking the Government to provide a temporary overdraft facility to pay for large claims in early years, which it says would be repaid to taxpayers in the future.
Whilst Cameron has urged progress in Prime Minister’s question time and Owen Paterson, the Environment Secretary, assures the public that he is determined to strike an agreement, the Government seems to be failing to provide any concrete alternative solutions. The ABI are baffled as to why the Government has rejected their proposals but presumably the answer to that must lie in the strained budget.
In a letter from the Environment, Food and Rural Affairs Committee to Owen Paterson on 28 November, MPs demanded an update on progress on providing insurance to high risk properties once the Statement of Principles expires next year. Whether or not they get a comprehensive response remains to be seen.
All property owners need to be aware of the potential consequences of these potential changes to the flood insurance market in order to be able to assess the possible financial impact. Where properties are owned freehold, without finance and owner occupied, the property owner may be happy to weigh up the benefit and cost of insurance against the risk of flooding. However, where property ownership is complicated by leases and financing, the picture is not quite as straightforward and it would be prudent to understand where the risks and liabilities fall, particularly in high flood risk areas.
For more detailed commentary on the issues facing landlords, tenants and lenders against this backdrop, please see our earlier article published in the summer 2012 edition of Real Estate Quarterly, available here.