Treasury raises the stakes in flood insurance debate

The debate over the future availability of flood insurance is starting to look like a high stakes game of poker between the government and the insurance industry. This morning the government just raised those stakes by £120m.

Danny Alexander, Chief Secretary to the Treasury (pictured), took the opportunity of a visit to Leeds to announce new flood defence schemes for Sheffield, Ipswich, Derby and Exeter, protecting an estimated 60,000 homes. This follows hard on the heels of David Cameron using this week's Prime Minister's Question Time to promote the government's current flood defence programme which he said was already worth £2bn over the next four years.

Does this change the nature of the debate over the future of flood insurance and its potential outcome? I think it does.

It signals that the government is not prepared to play out the debate on the insurance industry's terms with the focus on subsidising the early years of a pooled insurance scheme. The government has now clearly said that it prefers to put more money into practical flood prevention rather than - as it sees it - subsidising the insurance industry. This is a neat move because it takes the debate back to where it was when the Coalition came into power and started to cut spending on flood defences, giving the insurance industry the opportunity to opt out of continuing the Statement of Principles. Some cynics would say that the government gave the industry the excuse it was looking for to back away from the commitments enshrined in the Statement.

The insurance industry obviously riled the government last week when it went on the attack over the impasse it had reached with DEFRA (Department of Environment, Food and Rural Affairs) over flood insurance. DEFRA had clearly lost the argument with the Treasury about making money available to support a replacement pooled insurance scheme - often referred to as Flood Re - but couldn't bring itself to admit as much. I had always thought the Autumn Public Expenditure Statement was the last chance for getting any extra money to tackle the problem but I was doubtful about whether it would be forthcoming.

The strongly worded attacks on DEFRA's failure to resolve the issue by the Association of British Insurers have hit home but probably not produced the result the ABI anticipated.

Firstly, the Treasury has unexpectedly produced some more money in advance of the Autumn Statement. Secondly, the issue has been taken out of DEFRA's hands and is now being handled by nos 10 and 11 Downing Street. Note the order in which the comments are presented in the Treasury press release: Treasury minister, Prime Minister and, finally, the Environment Secretary Owen Paterson. This passing of control to the heart of the government explains why the strategy has suddenly changed to a renewed focus on flood defence spending, cutting off the insurance industry's original line of attack.

It is a shrewd move and one the industry will need to ponder.

The Prime Minister's next move will be to say that the government prefers to spend money on real, practical measures to prevent flooding and that as it is showing good faith with hard cash the insurance industry should be prepared to set up - and subsidise in the early years if necessary - a pooled insurance scheme using its own resources.

That definitely changes the terms of the debate. Your move ABI.