Free market looms for flood insurance

The government seems to have conveniently convinced itself that there is no over-riding urgency to get a new scheme to provide affordable insurance to up to 200,000 households in flood-prone areas after the end of June. This is when the ten year stand-off between the government and the insurance industry - anonymously termed the Statement of Principles – expires.

This is the conclusion one must draw from yesterday's twin-pronged Parliamentary assault on the issue which saw the Secretary of State, Owen Paterson, appearing before the Environment, Food and Rural Affairs Select Committee at the same time as his floods minister, Richard Benyon pictured top), was on his feet in the main House of Commons chamber answering a well-attended backbench debate on flood insurance. It sadly says alot for the chaotic way Parliament runs that these two important events should clash.

Let's take the Secretary of State's evasive answers to the Select Committee first.

Amid all the prevaricating about continuing negotiations was a remarkable statement from Mr Paterson (left) dismissing the end of June cut-off as an "artificial deadline" that he will not be rushed to meet.

In what way, shape or form is the expiry of the Statement of Principles artificial? It certainly isn't artificial to homeowners looking at facing a future with no insurance in a little over three months' time.

It has been known about for years. Both Mr Paterson, his predecessor Caroline Spelman, and even the Prime Minister, have previously acknowledged the importance of getting a new scheme in place well before this deadline. To dismiss it now shows just how far off the rails the negotiations between the government and the insurance industry are.

Couple those remarks with Mr Benyon's response to the debate in the main chamber and the picture regarding what will happen on 1 July becomes clear:

"We are doing other things to help those who might be struggling to find affordable insurance. We have published a guide to obtaining flood insurance in high flood risk areas in collaboration with the National Flood Forum, Which? and insurance industry representatives. The guide helps people navigate through the insurance market and acts as a signpost to actions that individuals can take to reduce their flood risk.

"Insurance can be found for reasonable prices if people talk to their insurer about their specific circumstances. The Environment Agency can provide supporting evidence on the local flood risk, for free, which people can use in discussions."

It will be a free market.

How has it come to this?
Despite MPs from all parties proclaiming support for the Association of British Insurers' preferred solution – Flood Re – Mr Benyon was dismissive of this and is clearly giving house room to the last-minute proposal put forward by Marsh and christened Flood Mutual. Constituency MPs who had looked at the mutual option were not impressed because it offered neither universality nor a cap on premiums, something the supporters of Flood Re claim for their solution.

His comments on Flood Re reveal where the real sticking point is – and why Flood Mutual appeals to the government – it isn't prepared to risk a penny of public money on a new scheme or be put in a position where the government has to announce an increase in Insurance Premium Tax:

"He (Jonathan Evans) made the point that “Flood Re” is a not-for-profit solution. Well, yes and no, in that the Government would pay through a levy—so householders are paying for it with an element of underwriting—but taking away risk from the most at risk is an advantage to the industry. So we must be very careful. The Minister’s job is to look after the taxpayer and householder. Yes, we need a solution, but not at any price. Whoever was standing at the Dispatch Box, they would not want to bring before the House a deal that was unworkable or that would cause the wrong sort of increases for some of the most at risk and hard up of our constituents".

The minister said that he wanted something better than the Statement of Principles but gave no indication of what his measures of "better" would be so we are none the clearer on where the Department of Environment, Food and Rural Affiairs is hoping to take this debate.

I was also struck by the sudden introduction, especially by Mr Paterson, of the concern that primary legislation might be needed to enact a solution. Where has this come from? It was never mentioned by ministers before and seems little more than a delaying tactic. Indeed, the point was largely dealt with by Jonathan Evans in his contribution to the debate when he pointed out that the equivalent scheme to cover terrorism risks, Pool Re, was put in place in a couple of weeks and that the arrangements to provide aviation insurance after 9/11 were resolved in a matter of days without the need for primary legislation.

Waters have been muddied
Despite two attempts to clarify things yesterday no-one is any the clearer on where we stand. I know the supporters of the Flood Mutual option are getting excited that their scheme might be the chosen option but I think their optimism is misplaced. They have muddied the waters and are being used as an excuse for inaction by the government. It certainly doesn't pass Mr Benyon's test of being better than the Statement of Principles and neither does it meet the expectations of MPs for a universally available and affordable solution. This doesn't mean that it is dead in the water as a desperate government, faced with the chaos of a free market, a wet summer and thousands of uninsured homeowners might be tempted to throw half a bone (which is what Flood Mutual represents) at the problem.

Another option seems to me to be that the ABI goes away, talks to some major reinsurers, and comes back with a revised – inevitably more expensive – version of Flood Re that cuts the government out of the equation. Now that would be feather in the industry's cap.

Are ministers just being canny?
Perhaps, just perhaps, Messrs Benyon and Paterson are being very canny. Maybe they really do believe that the free market won't be such a scary place for householders looking for flood cover. They may really believe that many of the very round figure of 200,000 householders frequently quoted as being threatened with facing an almost impossible task in finding affordable insurance will actually succeed and that the residual problem will be much smaller and therefore more manageable. They can then come in with a much more limited scheme to support the few who are still left without cover. Maybe.