Insurance deal could hail a "flood tax"

Updated: 
dingy on flooded roadFlood-risk homeowners can expect to continue to be subsidised after some government arm-twisting of insurers.

The government said it wanted to see "how the existing cross-subsidy that takes place within the insurance industry can be adjusted to make sure insurance prices remain affordable." For that, read a "flood tax" on homes least at risk to pay for those most at risk.

Government responsibility?

The UK is unusual in having commercial insurance available to cover flood risk – in most countries the government has to pay. The UK government doesn't want this and has convinced insurers to continue offering flood-prone homes insurance cover, even though the insurers know it is economic madness to insure such risky properties.

But insurers are up to their eyeballs in flood claims again, with the recent bad weather, and are determined to scrap the agreement, called the Statement of Principles, that forces them to continue covering waterlogged homes at low premiums.


Environment secretary Caroline Spelman and Association of British Insurers' director of general insurance Nick Starling, have both said they are close to agreement on a replacement.

The Telegraph has reported that this will be 10% levy on all home insurance polices, a figure denied by the ABI.

Go further than Statement of Principles

Spelman said: "We want to go further than the Statement of Principles to reach an agreement that ensures both the availability and the affordability of flood insurance for the first time.

"The insurance industry and the Government, working closely together, have made great progress towards this goal. We are now considering a cross-subsidy mechanism that would ensure high -isk households can get affordable insurance without extra costs being placed on policy holders or taxpayers.

"The best and most sustainable way of keeping insurance affordable in the long-term is to help prevent flooding in the first place. We are spending more than £2.1 billion on flood risk management, and are on course to exceed our goal to better protect 145,000 homes by March 2015."

Replacement for Statement of Principles

Starling said: "Insurers have been committed for a long time now to trying to finding a new replacement solution for the current Statement of Principles agreement that is better for customers and secures the availability and affordability of flood insurance.

"We have done a lot of work on this issue and are currently at an advanced stage in our discussions with Government. Insurers continue to provide cover for flooding as a standard part of UK home and small business insurance and we remain committed to doing our very best to help those that suffer the devastation flooding brings."

No to market forces solution

Earlier this year Spelman rejected a pure market solution, normally favoured by Conservatives. This wouldmean those at highest risk paid premiums that reflected the risks, while the rest of us stopped subsidising the high-risk homes.

She said in May: She said: "Risk-based insurance pricing provides an incentive for households, businesses and communities to reduce their flood risk. In the long-term this will save everyone money.

"But risk-reflective insurance pricing needs to be introduced gradually, allowing markets to adjust steadily, whilst supporting those unable to bear the true cost of flood risk to their homes."

Flood defences woeful

The government has also failed to adequately deal with flood risks, not spending enough on flood defences, allowing planning for new homes on river food plains and allowing water companies to make millions of profits while not investing ion new drains to clear surface rainwater away fast enough.

In January this year the influential Commons Public Accounts Committee report, 'Flood risk management in England', warned that 5.2 million homes are at risk from flooding, and the annual cost of flood damage could rise from its current £1.1bn.

It said: "We were very concerned that the Department did not accept ultimate responsibility for managing the risk of floods. The Department told us it shared responsibility with the (Environment) Agency and local bodies. We are concerned that there is no clarity about where the buck stops. It is not acceptable that local people do not know clearly where responsibility for decisions lies and which body is answerable when things go wrong.

100 constituencies

The Environment Agency's own data shows that in nearly 100 political constituencies in England and Wales there are 1000 or more homes at high risk of flooding. And the Environment Agency says that flood defence expenditure needs to increase by 80% by 2035 simply to contain the flood risk to current levels.

The PAC said: "The Department relies on inconsistent and unstructured intelligence on local flood risk management performance. Local authorities are producing risk assessments but the Department does not have plans to assess their quality.

"The Department needs reliable information to inform its decisions on when and where to intervene if local risk management plans are inadequate."

Spending cut

According to PAC reports, in 2010-11 Defra spent £664m on flood and coastal risk management, 95% of which went to the Environment Agency.

It said that in 2009 the Agency projected that its flood risk management budget needed to rise by 9% during the spending review period (2011-15), but that during the same period the Agency's flood risk management budget was reduced by over 10%.

The PAC reported that Defra wanted to increase local councils' contributions from £13m to a £43m but had not secured these commitments. It said: "Expecting an increase in local authority contributions when their resources are reducing may well be overoptimistic."

So it looks like the government is going to duck out again, leaving insurers to collect the new "flood tax" from their customers in safe houses.

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