Examination of Witnesses (Questions 1-19)
MR NICK
STARLING, MS
JANE MILNE
AND MR
DAVID PITT
14 DECEMBER 2005
Q1 Chairman: Good afternoon, ladies and
gentlemen. Can I welcome our two sets of witnesses: from the Association
of British Insurers, Mr Nick Starling, the Director of General
Insurance, and Jane Milne, Head of Household and Property, and
from Royal SunAlliance Mr David Pitt, who is Head of their product
MORE TH>N. I promise you, Mr Pitt, I have had to constrain
the Committee. They all had these detailed questions about their
policies, but I told them this is not the occasion for asking
that kind of question! So we will stick to the brief which you
have come to talk to us about. Can I thank you very much indeed
for the written submission you have made. It was very helpful
indeed. On page three of a document from the ABI entitled "Revisiting
the Partnership Five Years on from Autumn 2000"[1]
you say: "Every year the UK insurance industry pays out between
£500 million and £1 billion in weather-related claims."
Looking back over the last five years, we have seen an increase
in quite severe weather incidents. With that background, can you
give us some indication, if you are able to, to ascribe the premium
income which goes against the level of pay-outs because what is
not clear to us is how you are placed, if you like, in business
terms as to whether insuring the types of risk you refer to are
in fact making you any money?
Ms Milne: The premiums, of course,
cover a whole range of perils which include fire damage and burglaries,
etc., as well as the weather perils, but overall household insurers
I think made a profit as an industry last year for the first time
for some time if you look just in straight underwriting terms
and ignore the investment income.
Q2 Chairman: I mentioned the question
of timescale and pay-outs. Has that pay-out rate been going up
over the last five years?
Ms Milne: We certainly saw an
increase over a period. Last year, in fact, turned out to be quite
a benign year weather-wise and then we got into this year and
in January saw the Carlisle flood. So it is just luck of the draw
as to when the events happen often.
Chairman: It would be helpful for us
to have perhaps some kind of relationship between pay-outs and
time because one of the themes running through your evidence is
your observations on the conduct of the Environment Agency in
terms of flood protection, and I think you acknowledge there have
been some improvements. If that is the case, then one would have
expected to see that in some way reflected in the overall global
position. So I wonder if you could have a look back at your data
to see if you can help us on that, and also in terms of perhaps
doing a bit of work on the premium income side, because obviously
in setting a premium there must be a weighting effect within that
number to ascribe to the types of flood risk. If you could help
us, to give us some perspective on that, I think it would be very
helpful indeed. I want now to ask James to continue with that
questioning.
Q3 James Duddridge: In some of the
regions the Agency is developing temporary flood defences and
we have seen examples of those on the River Severn in Bewdley.
Does the industry have sufficient confidence in their timely deployment
of those defences, and specifically to what extent is that reflected
in the insurance premium?
Mr Starling: Can I start on that
one, if I may? We think that these defences work, they can operate
properly, but as with all technology it is how you do it that
matters and you have to have a proper plan to do it. You need
to know where they should be deployed, and so forth. So there
is the issue of the defences themselves, which as far as we can
see do operate well, but it is actually putting them into practice.
Ms Milne: There is also a slight
difference between the demountable defences which are used in
Bewdley, where they are dedicated to that particular site, and
the temporary defences which were used in places like Shrewsbury
and Ironbridge, where they could be used at a number of different
sites. So one of the things insurers need reassurance on is that
they will actually be deployed in that location at the moment
it is needed. There is a lot of infrastructure in terms of plans
and personnel which needs to go around it as well.
Q4 James Duddridge: So presumably
at the moment you have not got that assurance and as a result
the premiums of some of those houses where the temporary defences
could be put in place are actually higher?
Mr Pitt: Can I pick up on that,
please? With the demountable defences, I think Nick mentioned
the importance of the process in preparing and the early warning
signs so that the defences are in place. If I refer back to February
2004, those demountable defences were deployed when the Severn
started to rise. As an insurer, we were waiting to see how they
worked and as a result we were successful in that particular incident.
In our own mapping tool, we actually went back and re-rated round
about nine postcode areas in that particular region because of
the success of the demountable defences. So we moved the rating
from high rating back down to moderate because those defences
were deployed, the process worked and because of our confidence
in those defences.
Q5 Chairman: Where else could they
be deployed? Have you done any analysis on that?
Ms Milne: They work best where
you get a lot of warning of flooding, because you need some hours
to actually deploy them. They have been used quite widely on the
Continent on the very long rivers they have there. In England
it is probably only rivers like the Severn, the Trent or the Thames
where you could usefully use them.
Q6 Chairman: Let me re-focus your
mind on the question I asked. You mentioned you have your own
mapping tools, and I think SunAlliance have got theirs. It would
not be unreasonable to suggest that you might have compiled a
list of places where you thought this kit might have been effective.
I am just a bit surprised that you have not.
Mr Pitt: Our own mapping tool
is really for our own purposes, to rate the potential of a flooding
risk. One of the submissions we actually made was line of sight
of potential defences and where defences are going to be built
in the future, really to allow us to hone that flooding risk and
improve the mapping tool and we believe it is really important
for insurers to have that information so that we can assess the
risk accurately, rather than insurers deciding where defences
should be built.
Q7 Chairman: I appreciate you do
not want to decide where they should be, but what I am interested
to know is that if the Environment Agency is competing for resources
then it has to make a case out. Ms Milne, you identified rivers
of a certain characteristic where these particular devices could
be successfully deployed. I just wondered if you had looked at
the United Kingdom and said, "Well, okay, here is the range
of places," and put that to the Environment Agency and said,
"What's your roll-out programme? Are you going to do this
more, now you have proved it at Bewdley?"
Ms Milne: We certainly have had
general conversations with the Environment Agency. We do not second-guess
the Government's own system for identifying where they are going
to get the maximum benefit, although obviously we do have quite
a lot of discussions around places where we are aware there are
problems.
Q8 Chairman: But as an industry you
are quite happy to have your own mapping tool, as are SunAlliance,
so you could argue that is second-guessing the Government?
Ms Milne: That is being used to
make commercial decisions over offering cover though.
Q9 Chairman: So if the cover level
has changed then it would not be unreasonable to suppose that
by identifying other areas for the use of these moveable defences
it could actually be part and parcel of helping people along a
bit really?
Ms Milne: We are lobbying in general
for improved protection, whether it is through conventional defences
or—
Q10 Chairman: Okay. Can I just ask
you, in your evidence you mention the skills base involved in
this kind of thing and you comment about engineering staff. In
your judgment, does the Environment Agency have sufficient qualified
engineers to deal with both the demountable issue as well as the
wider flooding issues? What is your assessment of their engineering
capability?
Ms Milne: The Environment Agency
has told us—and we know it has been in discussion with the
Institute of Civil Engineers—that it is concerned about
ensuring it has an adequate skills base available currently and
for the future.
Q11 Chairman: What do you think that
means, "They are concerned about ensuring that they have"?
Have they been more explicit and said, "We haven't got enough
engineers and we can't pay enough to keep the ones we have got"?
Ms Milne: I think there certainly
have been some discussions about whether their reward structure
helps them retain staff, yes.
Q12 Chairman: All right. You employ
engineers in the insurance industry. What do you think, Mr Pitt?
Have they got enough? Are they adequately supplied with these
skills? You can be honest with us.
Mr Pitt: To be honest, I cannot
comment on that. I can only comment in our own structure of how
we went about preparing our own mapping tool, and we did employ
our own force of engineers to concentrate on this and have been
in development with the tool since 1998. So it has been important
for us throughout that genre that we have maintained the consistency
and quality of our engineering force.
Q13 Chairman: Do not feel embarrassed
if you want to tell us directly, if you think they need more engineers
they ought to pay them more money?
Ms Milne: I think if they are
to roll out a larger programme in future, which undoubtedly they
are going to need to do if they are going to keep pace with climate
change and increasing risks and the long backlog of work from
under-investment in the past, then they will need more qualified
staff to do that.
Q14 Lynne Jones: How satisfied are
you with the adequacy of cooperation between the Environment Agency
and other agencies which have enforcement powers in this area,
such as water companies, particularly in relation to urban areas
where you have a greater complexity of the cause of flooding and
the involvement of possible overflowing of sewerage, mis-connections
of sewerage, and so on?
Ms Milne: I think in the past
it has been quite poor and we were very concerned that there were
one or two remarks immediately during the autumn 2000 floods about
"the wrong sort of water," which we did not feel was
an adequate answer. I think it has improved immensely since then.
It depends a bit from area to area. There has been some very close
work done, for example, between Severn Trent and the Environment
Agency in the Birmingham area and I know the Agency is working
very closely with United Utilities up in Carlisle now. There is
a slight sense that they need to have a crisis before something
actually happens, though.
Q15 Lynne Jones: Since you mention
Birmingham, I am from Birmingham and I have had recent examples
in my constituency of householders mis-connecting sewerage into
the normal water drainage. Severn Trent has been aware of this
and has not really taken timely enforcement action, which has
resulted in sewerage getting into the water courses and obviously
into people's back gardens and into their houses as well, which
would affect yourselves. This has been known since 1996 and yet
it is only just now that enforcement action seems to have been
taken by Severn Trent. Should the Environment Agency not have
been rather more breathing down their necks, for example, they
knew about this problem, in terms of ensuring that Severn Trent
took more timely action?
Ms Milne: I think there has not
been enough done in the past, but in Making Space for Water
the Government did set out that they were looking for practical
ways of actually making this operate better in the future and
they are going to be running some pilots, and we will be extremely
interested to see how those proceed because it is an important
area.
Q16 Lynne Jones: One of the problems
is that your clients and our constituents do not know who is responsible
for what. Obviously it is something which has caused you concern,
but you feel satisfied that this is being addressed now?
Ms Milne: Yes. We raised it when
we initially launched our Statement of Principles back in the
autumn of 2002 as an issue which needed addressing and we are
pleased to see it is on the agenda now but, like you, we would
like to see more action.
Q17 David Taylor: I think later on
we are going to be talking about the mapping of flood plains and
local planning and things like that, but on the back of what Lynne
has just asked about flooding in urban areas, which often does
result from things like run-off from roads and built developments,
things of that kind, there was significant flooding in my own
area about three years ago for the first time in very many decades,
but there were several dozen houses which were flooded there,
not several hundreds or more, as you might have seen in Carlisle.
Do insurance companies get together under the aegis of the ABI
to compare notes on the claims they have had on that sort of miniature
scale of local problems to see if there is anything they can contribute
as observations in terms of planning or in terms of the water
companies, or indeed the environment agencies?
Ms Milne: We certainly do on more
major incidents where it is probably in the news and public knowledge
anyway. It is much more difficult for us to capture information
on the more localised incidents, although if it is brought to
our attention either by the constituency MP or by local residents
then we will follow up on it.
Q18 David Taylor: So at what point
does local become significant? We had 50 to 60 houses flooded
in the central and urban area. If that had been 500 or 600 the
ABI would have been interested in the origins of that and the
ways of minimising future claims, would you?
Ms Milne: Potentially, we are
interested in everything. The reality is that we have limited
resources like everybody else and we can only actually take forward
a restricted number of individual cases, but even if it is only
a few houses, if it is a persistent problem we will follow it
up.
Q19 Chairman: Ms Milne, you said
something intriguing. You said, "There's a slight sense they
need to have a crisis before something happens." Would you
like to expand on what lay behind that interesting comment?
Ms Milne: The particular examples
I used all happened once there had been some local flooding and
there was a recognition that there was a problem which needed
to be handled. I am not aware of similar activities going on in
places where there has not yet been a problem but perhaps there
might be.
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