After the deluge, a logjam over insurance

Talks between insurance bosses and ministers to guarantee cover for homes have got bogged down. Mark Leftly and Jamie Dunkley report

In Skipton, north Yorkshire, a family of three sheep huddled together on a small patch of raised land, as flash floods sent the surrounding field underwater. A 66-year-old maths teacher, Mike Ellis, died as he lost his footing in a stream that had become a torrent on his way home in Bitterley, a small village in Shropshire. The river Windrush rose by almost two metres, putting residents in the town of Witney, west of Oxford, on alert that their homes could soon be devastated by overflowing water.

These make up a tiny handful of the incidents that resulted from the UK's worst floods since 2007 this year, which will result in insurance companies coughing up around £1bn from related claims.

Although a less arresting anecdote than other tales from this year's floods, the images of homeowners fleeing their properties in that third example in Oxfordshire last month could prove to have saved millions of people from crippling insurance premiums.

Many of those residents would be Conservative Party voters, and what's more, their MP is the Prime Minister. It was around this time that David Cameron put one of his most trusted lieutenants, the Cabinet Office minister Oliver Letwin, in charge of negotiations over insurance cover for 200,000 homes that are at high risk of flooding.

Since 2000, the Association of British Insurers and the Government have had an agreement, known as the Statement of Principles, which has effectively meant that the industry has subsidised these homeowners in exchange for state investment in flood defences. This agreement, which means that the policyholders pay about £340 a year for insurance that sees a typical pay-out of £20,000-£30,000, expires next June.

The insurance industry argues that the Government has not held up its side of the bargain, that investment in flood defences has not been sufficient to keep up with the impact of climate change and developments such as cementing over permeable soil. What's more, as flooding becomes an increasingly devastating problem, the 5.2 million homes considered to be at risk become far likelier to suffer water damage.

Disastrously, the Government and the ABI have struggled to come up with an alternative arrangement, which in the worst case scenarios could see premiums reach unaffordable levels of even £30,000 or insurers refuse to provide some homes with a policy at all. In November, talks had broken down and the ABI admitted to an "impasse".

However, The Independent on Sunday can reveal that Mr Letwin and the ABI's director general, Otto Thoreson, met last Thursday at the start of a final push to agree a replacement system. Without it, regional housing markets and therefore local economies could collapse at a time when regions outside London continue to be badly hit by the financial crisis.

The ABI wants a pooled fund that would see an £8 levy introduced on every home insurance policy to subsidise those at greatest risk of flooding. However, it would take several years to build up a war-chest sufficient to match the liabilities of a 2007 or 2012 set of floods, so the ABI has asked for a government overdraft in case damage of that magnitude takes place soon after a deal is in place.

Ultimately, this is a matter of £100m to £200m, which would be repayable and is trifling in contrast to the £3bn of insurance payouts made five years ago.

The ABI's head of property insurance, Aidan Kerr, says: "We know that the free market isn't the answer, but there are one or two fundamental issues that we are trying to get over with government. I'm confident that there is enough drive within government and the ABI not to move to a free market."

However, many senior insurance industry executives are less confident. One said: "If the ABI system is adopted this would leave the Government underwriting a potentially eye-watering overdraft should a few major floods come quickly. It has become clear that the Government has no appetite for this so-called contingent liability. A similar scheme in America saw its pooled funds wiped out by Hurricane Katrina, leaving a $6bn (£3.7bn) hole in its finances.

"Letwin needs to find a way to ensure vulnerable homeowners are protected after June 2013 but also to help spread the cost of this protection in a way that doesn't spook the dry majority of homeowners."

What is particularly worrying is that insurers have to model the costs of their policies several months ahead of any renewals, so many are understood to be drawing up plans in case the talks come to nought.

Progress has been so slow – the introduction of a new Environment Secretary, Owen Paterson, in September who was distracted by the badger culling issue did not help – that many insurers do not believe that any agreement is forthcoming. Cameron suggested that letting Letwin take charge of the issue brought negotiations to the heart of government, though it can easily be considered a rebuke of Paterson for failing to find a middle ground with industry.

"Nothing's going to be announced this side of Christmas," says Ashwin Mistry, the outspoken chairman at Brokerbility. "This is an issue that's got to be tackled now. You're looking at two million homes being affected by this over the next 10 to 15 years. That's going to hit the housing market, funding and resale values. We're the only country in the western world where the Government doesn't provide flood cover."

For example, in the Netherlands floods are excluded from insurance policies and the state is responsible for losses, while Iceland has a public insurance company that provides compulsory cover for natural disasters.

There are alternatives to the ABI's idea, including Project Noah, developed by the insurance giant Marsh, which essentially transfers the cover to the international reinsurance market, whose major companies specialise in catastrophes. Some sources think that this plan is gaining traction in government circles, though it would also require the support of the ABI.

And even just letting the free market dictate prices might not be disastrous – for now. The British Insurance Brokers' Association head of technical services, Steve Foulsham, says that premiums would only go up dramatically or insurers "run away" next year if floods were on a similar scale to 2012, though that is possible.

Paul Cobbing, chief executive at the National Flood Forum, who spent the early part of last week lobbying MPs on the issue, sighs when asked if a deal can be struck. "I just don't know is the serious answer. Negotiations have been pretty critical for some time."

Perhaps the utter disarray of the whole situation is best summed up by an incident from a few weeks ago. In October, the Hull North MP, Diana Johnson, handed over 300 letters from her constituents to the Environment department detailing their problems finding affordable flood insurance. The department lost them. The letters only turned up five weeks after Ms Johnson had delivered them.

Her response: "This shambles is getting like an episode of The Thick Of It, with Laurel and Hardy as guest stars."

The insurance industry and millions of worried homeowners would surely agree.

PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
News
science
News
people
Life and Style
President Obama, one of the more enthusiastic users of the fist bump
science
Arts and Entertainment
Peter Griffin holds forth in The Simpsons Family Guy crossover episode
tv
Life and Style
Upright, everything’s all right (to a point): remaining on one’s feet has its health benefits – though in moderation
HealthIf sitting is bad for your health, what happens when you stay on your feet for a whole month?
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Data Governance Manager (Solvency II) – Contract – Up to £450 daily rate, 6 month (may go Permanent)

    £350 - £450 Per Day: Clearwater People Solutions Ltd: We are currently looking...

    Java Developer - Banking - London - Up to £560/day

    £500 - £560 per day: Orgtel: Java Developer FX - Banking - London - Up to £560...

    HR Business Analyst, Bristol, £350-400pd

    £350 - £400 per day + competitive: Orgtel: My client, a leading bank, is curre...

    Account Manager - (Product & Account Management, Marketing)

    £26000 - £30000 per annum + Benefits: Ashdown Group: Account Manager - (Produc...

    Day In a Page

    A new Russian revolution: Cracks start to appear in Putin’s Kremlin power bloc

    A new Russian revolution

    Cracks start to appear in Putin’s Kremlin power bloc
    Eugene de Kock: Apartheid’s sadistic killer that his country cannot forgive

    Apartheid’s sadistic killer that his country cannot forgive

    The debate rages in South Africa over whether Eugene de Kock should ever be released from jail
    Standing my ground: If sitting is bad for your health, what happens when you stay on your feet for a whole month?

    Standing my ground

    If sitting is bad for your health, what happens when you stay on your feet for a whole month?
    Commonwealth Games 2014: Dai Greene prays for chance to rebuild after injury agony

    Greene prays for chance to rebuild after injury agony

    Welsh hurdler was World, European and Commonwealth champion, but then the injuries crept in
    Israel-Gaza conflict: Secret report helps Israelis to hide facts

    Patrick Cockburn: Secret report helps Israel to hide facts

    The slickness of Israel's spokesmen is rooted in directions set down by pollster Frank Luntz
    The man who dared to go on holiday

    The man who dared to go on holiday

    New York's mayor has taken a vacation - in a nation that has still to enforce paid leave, it caused quite a stir, reports Rupert Cornwell
    Best comedians: How the professionals go about their funny business, from Sarah Millican to Marcus Brigstocke

    Best comedians: How the professionals go about their funny business

    For all those wanting to know how stand-ups keep standing, here are some of the best moments
    The Guest List 2014: Forget the Man Booker longlist, Literary Editor Katy Guest offers her alternative picks

    The Guest List 2014

    Forget the Man Booker longlist, Literary Editor Katy Guest offers her alternative picks
    Jokes on Hollywood: 'With comedy film audiences shrinking, it’s time to move on'

    Jokes on Hollywood

    With comedy film audiences shrinking, it’s time to move on
    It's the best of British art... but not all is on display

    It's the best of British art... but not all is on display

    Voted for by the British public, the artworks on Art Everywhere posters may be the only place where they can be seen
    Critic claims 'I was the inspiration for Blanche DuBois'

    Critic claims 'I was the inspiration for Blanche DuBois'

    Blanche Marvin reveals how Tennessee Williams used her name and an off-the-cuff remark to create an iconic character
    Sometimes it's hard to be a literary novelist

    Sometimes it's hard to be a literary novelist

    Websites offering your ebooks for nothing is only the latest disrespect the modern writer is subjected to, says DJ Taylor
    Edinburgh Fringe 2014: The comedy highlights, from Bridget Christie to Jack Dee

    Edinburgh Fringe 2014

    The comedy highlights, from Bridget Christie to Jack Dee
    Dame Jenny Abramsky: 'We have to rethink. If not, museums and parks will close'

    Dame Jenny Abramsky: 'We have to rethink. If not, museums and parks will close'

    The woman stepping down as chair of the Heritage Lottery Fund is worried