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Flooding: A Stay of Execution for the Statement of Principles

The Statement of Principles on the Provision of Flood Insurance, an agreement currently in place between the Association of British Insurers and the government which committed insurers to provide affordable flood cover for domestic and small business premises, was due to expire at the end of this month, June 2013.  

Over the past year, negotiations over the future of flood insurance between insurers and the government have been variously described as “constructive”, “arduous and difficult” and “urgent”.  Now they are apparently at “an advanced stage”. 

Finally in May this year we had a stay of execution (of sorts).  The ABI agreed that its members would voluntarily continue to offer flood insurance to homeowners until the end of July.  The question is whether the additional month will enable the ABI and the government to resolve what they have been unable to resolve over the preceding year.

If an agreement cannot be reached and the ABI and the government do not agree a further extension, the ramifications could be significant for all properties at risk of flooding, not just the 200,000 designated as high risk.  Without such agreement, UK flood insurance will move towards a market-based approach in which insurance premiums will be proportionate to actual risk.  Flood insurance for such properties may become difficult to obtain or it may become prohibitively expensive.  In turn, this could make selling such properties difficult as lenders will not lend against uninsurable properties.  The prospect of “unsellable homes” is not one which the government wants to entertain. 

The Statement of Principles does not cover commercial properties other than those qualifying as “small business premises”.  In the commercial sector, the cost and availability of flood insurance is already subject to a market-based approach.  Industry experts, including the BPF, have recently expressed concern that with increased incidences of flooding and without intervention  from government, commercial flood insurance could become a real area of concern for the real estate industry.

Any alternative to opening flood insurance to the free market will require legislative action and it is certainly not something that the government could do quickly or without the risk of alienating the insurance industry if an agreement is not reached.  In the meantime, 2012 was the wettest year on record in England and Wales and the Environment Agency predicts that by 2035 the number of properties at significant flood risk will rise by 350,000.  It is to be hoped, therefore, that the government and the ABI will resolve their differences and announce a solution quickly.