Select Committee on Environment, Food and Rural Affairs Minutes of Evidence


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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