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Countdown to a free market for flood insurance?

The countdown is on. There are now only two and a half months before the Statement of Principles on flood insurance comes to an end.  The Statement is an agreement between the government and the Association of British Insurers in which the insurance industry agreed to provide flood cover for domestic and small business as widely as possible.  It expires at the end of June of this year.  Worryingly, the government seems to be no further forward in putting in place a new scheme to enable high flood-risk areas to obtain affordable insurance.

In the week before Easter, the Secretary of State for the Environment, Owen Paterson, appeared before the Environment, Food and Rural Affairs Select Committee on the same day as his floods minister, Richard Benyon, was answering a backbench debate on flood insurance in the House of Commons.

Notwithstanding this flurry of activity, we remain very much in the dark as to how the government sees this playing out and on what timescales. The comments at both the Select Committee and in the House of Commons are, however, enlightening in a couple of rather surprising ways.

First, Owen Paterson intimated that there was little point in coming to an agreement for the sake of it; instead, he dismissed the end of June cut-off as an artificial deadline that he will not be rushed to meet. This is at odds with the fact that his predecessor had previously acknowledged the importance of getting a new scheme in place well before this deadline. In what way is the deadline now irrelevant and artificial? Homeowners facing the prospect of being unable to obtain insurance as the rains keep coming would certainly disagree.

Secondly, Owen Paterson raised the possibility that primary legislation may be required as part of any solution. It is surprising that this has been raised for the first time by ministers only a couple of months before the expiry of the Statement, especially as it would be a tall order to enact any such legislation before the end of June.

So where does this leave us? The possibility of a free market for flood insurance come July cannot be dismissed. What does seem clear is that the government isn’t prepared to risk public money by underwriting any new scheme or risk having to announce an increase in insurance premium tax, both of which would be required for the scheme currently proposed by the ABI.

In the meantime, the latest proposal comes from Marsh, who have put forward a scheme dubbed “Flood Mu” where 50% of an insurer’s flood claims are mutualised across all insurers in proportion to their book size. The remaining 50% would remain with the holding insurer. Flood Mu has, however, been slated by the ABI.  The ABI claims that Flood Mu would not safeguard affordability (because it would not place a maximum cap on flood premiums), nor would it safeguard availability (because insurers would still hold 50% of the risk and so it is difficult to see why they would want to cover high risk homes), nor would there be any financial incentive for the government to invest in flood risk management (because all of the risk would lie with the insurance industry). For that final reason only, maybe the government will want to give Flood Mu some legs in the debate?

For now at least, we will all have to wait and see.