Flood insurance: is the industry sleepwalking to disaster?

As the UK reels from another deluge of flood warnings and chaos as bad weather sweeps the country, the questions about what will replace the Statement of Principles that has ensured the availability of flood insurance for properties in high risk areas for the last decade become ever more pressing.

In case anyone has forgotten, this deal between the insurance industry and government expires next June and without anything to replace it home and business owners in flood-prone areas will fall on the mercy of the open market. Make no mistake, this will mean tens of thousands of people suddenly finding themselves unable to obtain flood cover as part of their household or business property insurance policies. Many more will find they are offered cover at premiums that are not affordable.

If it comes to this, who will get the blame? The insurance industry or the government? Let's be realistic: it will be the insurers who will get the biggest clobbering if this happens. It could be a public relations disaster for an industry that can ill-afford more bad publicity. Some in the industry seem naively to believe that the government can be made to shoulder, or at least share, the blame but this won't happen. The simple fact is that it is the insurance industry that has decided to walk away from the Statement of Principles without having anything to take its place, not the government. It will therefore be the insurance industry that gets the blame from consumer groups and MPs.

I don't think the industry, least of all the Association of British Insurers, is complacent about this risk although it does give the impression that it might be sleepwalking to disaster. I just don't get the impression they have worked out how to deal with it.

Pointing at the cuts to flood defence spending might have some intellectual validity as that was the government side of the deal behind the original Statement of Principles but I can't see it impressing those people who will be looking at financial disaster if they can't get insurance for their homes. For many this will knock-off eye watering amounts from the value of their homes.

With some justification the ABI feels let down by government, if not cruelly misled. From the high point last June when the then Environment Secretary Caroline Spelman (pictured) said that a deal involving a government-backed fund of last resort was near and the sun was blazing it has been all downhill. The Treasury vetoed her plans at the 11th hour, she got the sack and we had the wettest drought on record. You can't blame the government for the last bit but the intervention of the Treasury and the arrival of the fiscally-conservative Owen Paterson at the Department for Environment, Food and Rural Affairs is certainly the fault of government.

DEFRA is a notoriously incompetent government department as Mr Paterson has quickly found out with its bungling over the disease that threatens our Ash trees and this crisis has probably ended the chances of a Flood Re type deal emerging. My guess is that the last realistic chance of a decent scheme being put in place will be when the Chancellor George Osborne delivers the Autumn Statement on 5 December. I am not holding my breath because if Mr Paterson gets any additional money for DEFRA it will be to deal with the Ash tree crisis and not flood insurance.

It will then be over to the insurance industry to explain what has happened and prepare people for the consequences. I hope it is ready.