Are we nearing crunch time on flood insurance?

The temperature is rising in the discussions between the insurance industry and government about the future provision of insurance for households and businesses in high risk flood zones.

Optimism that an agreement on how to replace the 12 year old Statement of Principles which insurers have said they will withdraw from next June was rife towards the end of the Parliamentary session just a month ago. Chief among those fanning the flames of optimism was the Environment Secretary Caroline Spelman. She didn’t merely promise a replacement but went out of her way to suggest that it would be significantly better than what we have now. Many in the insurance industry thought that they were close to a deal on a Flood Re-type solution too.

That was all before the Treasury asked to have a look at the plans.

Inevitably, Treasury eyes went straight to the last page – what it could cost the taxpayer to stand behind this scheme as insurer of last resort. A few quick sums on the wave after wave of flood claims this summer and the Treasury came up with the answer – a lot. Crucially, that was a lot more than the zero figure it had in mind. The plans whizzed back up Whitehall to the Environment Department with, at the very least, a gentle request for a chat about the plans, if not a rejection.

Over the last month, concern has been growing in the industry that the note from the Treasury was closer in tone, if not substance, to the latter. That is why after a meeting at the British Insurance Brokers’ Association just over a week ago alarm bells were sounding about the lack of progress and the growing possibility that the insurance industry will have to extend the Statement of Principles beyond next June, something it is very hostile to.

There are around six weeks left to sort this out. The House of Commons returns for a couple of weeks in mid-September but then rises again for the three main party conferences, coming back with the Lords in early October. Any MPs who raise the issue in September will probably be given a holding response and will be happy to have put down a marker if a solution is no nearer. When both the Commons and the Lords gets back in October holding – “discussions are continuing” – responses are not likely to be enough. If the Treasury and the Environment Department haven’t found sufficient common ground by then that is when the insurance industry will come under intense pressure to roll the end of the Statement of Principles forward, probably until the end of 2013. Will the industry really refuse to do this? It will risk severe public and Parliamentary criticism if it refuses.