Securing the future availability and affordability of home insurance in areas of flood risk

Overview

This consultation seeks views on the Government’s proposals for ensuring that domestic property insurance continues to be widely available and affordable in areas of flood risk in the UK.  I with ministerial colleagues intend to seek powers to address this issue through the Water Bill, which was introduced to Parliament and published today.  Your views will help develop the final proposals to be put to Parliament later this year.

The UK has a multi-billion pound, world-leading, insurance industry. Insurance cover for flooding is included as a standard part of buildings and contents policies which helps people manage the potential financial consequences of their home being flooded. Mortgage lenders in the UK generally require mortgage holders to purchase buildings insurance which includes cover for flooding.

A series of agreements on flood insurance have been made between Governments in the UK and the insurance industry since the 1960s. The current “Statement of Principles” agreements, which are about to expire, require members of the Association of British Insurers (ABI) to make insurance including cover for flooding available to some, but not all, properties in areas at significant flood risk. The Statement of Principles does not control or limit the price that insurers can charge for this cover.

The insurance market is changing in a number of ways including as a result of more sophisticated flood risk models becoming available. Households in flood risk areas are more likely than in the past to be charged a premium that reflects their risk of making a claim.  While in the long-term this will help build greater awareness of flood risk, and encourage appropriate steps to be taken to reduce the risk of flooding, in the shorter term many households may struggle to afford ongoing cover.  Householders could face further anxiety if they are unable to meet the conditions of their mortgage or find it difficult to sell their home because of insurance problems. This could also create instability in the housing market in some areas.  If flooding were to take place, such households could be left in financial hardship, placing additional pressure on community support services and the State.  Therefore the Government intends to provide time-limited, transitional support to households at high flood risk to allow time for choices to be made and risk management action to be taken.  Such an approach would be a step-change better than the Statement of Principles it will replace. It would for the first time take steps to secure the affordability as well as the availability of flood insurance.

In the long-term, managing the risk of flooding will always be the best way of securing available and affordable flood insurance.  In England, £2.3 billion will be spent during the current spending period to protect households and businesses against flooding.  At least 165,000 households will be better protected against flooding in 2015 than they were in 2011.  Despite the over-riding need to pay down the deficit, tackling flood risk while avoiding inappropriate new development on flood plains remains at the top of the Government’s priorities.

Four broad ways to address the availability and affordability of flood insurance have been considered.  There are no easy options to deliver affordable flood insurance and all involve a degree of cost.  However, following extensive discussions the Government has reached a headline agreement with the Association of British Insurers on a proposed way forward.  This will focus on delivering the ABI’s proposed “Flood Re” reinsurance pool for high risk households.  A Memorandum of Understanding on Flood Re is being published alongside this consultation, with further details provided in this document.  I would welcome your views on Flood Re as the leading proposal at this stage.

There remain a number of aspects of Flood Re that need to be agreed with Parliament, the industry and the European Commission.  For this reason, the Government also intends to use the Water Bill to seek powers to allow us to regulate the industry to deliver affordable flood insurance should Flood Re prove unworkable or fail to achieve our goals.  Your views on this alternative option are also invited, including in relation to how it might work if it were to be needed.

This is a difficult issue to resolve, as the industry itself recognises.  No country in the world has a perfect system.  This Government nevertheless is committed to finding a sustainable approach that balances the needs of high risk households, wider policyholders and the taxpayer.  We want to ensure that households can continue to access insurance at an affordable price. We want to protect wider billpayers and the taxpayer, creating the conditions for a fair and gradual transition towards more risk-reflective pricing in time. We believe our proposals will achieve this.

I would welcome your views on the proposed way forward set out in this consultation.

RT HON OWEN PATERSON MP

What happens next

This consultation will run for 6 weeks with draft Water Bill clauses being published during the consultation period, to inform public debate. Views and evidence provided during the consultation process will help inform the final proposals to be put to Parliament later this year.