Examination of Witnesses (Questions 420
- 439)
WEDNESDAY 28 NOVEMBER 2007
MR STEPHEN
HADDRILL, MR
IGAL MAYER
AND MRS
BRIDGET MCINTYRE
Q420 Chairman:
You have argued, and we are going to probe that in some detail,
the burden share between what the Government ought to do and the
risks that you are likely to have to take, but just to put it
into context, because insurance people always say you cannot just
look at only one year, you have got to look at it over a long
period, if I arbitrarily select the last ten years and we talk
about household insurance as a generic product, has it been profitable
business for insurance companies or not?
Mr Mayer: The line of business
has been a profitable line for, I think, just about every insurer
in the UK and, if you look at the last decade up until the floods,
it has been profitable. I think the proof is if you look at what
has happened to household insurance rates. They have largely been
flat for over a decade where we have seen home values and the
values that are being insured go up substantially in that time
period. That suggests to me two things: (1) that the companies
are making money and (2) that we have a competitive and dynamic
market place that is working that has been able to keep that price
stable and affordable for citizens.
Q421 Chairman:
Is there any way you can try and quantify premiums in and payments
out? I suppose it must be quite difficult to split out of the
premium what the bit is for flooding and what you have actually
had to pay out. The reason I ask that question is that you have
made some demands, which we are going to come on to later, about
what the Government ought to be spending in this area, and obviously,
if that means a risk reduction or stabilising a risk position,
it means effectively that you are having a potentially "profitable"
business.
Mrs McIntyre: In terms of understanding
the cost of flooding, it is something that we absolutely do. If
you look at our household insurance premium and how we analyse
that, we absolutely make sure that we track the cost of flooding.
It is one of those things where you talk about a one in 75 event,
which the events were called in June and July. One in 75 suggests
one in 75 years. It is not; it is a one in 75 probability of it
happening. What all insurance companies really do is we analyse
that flooding cost the whole time and try and trend it forward
using a variety of data to get a view of how flooding cost is
trending and try and make sure that we put those into our base
rates to understand how the risk is going to be charged into the
premium.
Q422 David Lepper:
You mentioned the idea of insurance with rent in social housing,
et cetera. Is there any assessment of the number of households
affected by the floods this year who were not insured at all?
Mrs McIntyre: Within that particular
category?
Q423 David Lepper:
Or generally, yes.
Mr Haddrill: Yes. I do not have
the number to hand, but we could certainly give it to you. I have
a figure of something like around about 20 per cent.
Mr Mayer: I was going to say,
the anecdotal evidence, and speaking to local city authorities,
they were estimating, certainly on my visit to Gloucestershire,
somewhere in the 25 per cent range, which I have to say, as a
newcomer to the UK, I find quite surprising. I think there is
a real education issue here. We have a product that is largely,
I think, a very affordable product for the amount of protection
provided, and you can go well beyond flood. You talk about the
other perils that are protected and you also have to put that
into the context that this is, for most people, their single largest
asset. As a newcomer to the UK, I find it surprising that that
many people are taking the position to essentially not protect
against all perils.
Mr Haddrill: Especially, actually,
as it is supposed to be a requirement of the mortgage agenda;
so there might be something going on there that requires looking
at.
Q424 Mr Drew:
The problem with that is that not everybody could either achieve
insurance, and that is an issue which I hope you might look at
the very seriously, or, more particularly, some of the people
who were flooded in my part of the world in Gloucestershire (I
am a Gloucestershire MP) were in rented accommodation and there
was some argument about the degree to which the landlord was covering
buildings and the tenants were covering the contents. It sounds
easy, but it is never quite as easy as one would pretend, and
certainly it is not just education amongst the tenants. I have
to say, yourselves have got to do some work to really know who
your audience is because it is not as straightforward as it used
to be.
Mr Haddrill: I think the rented
issue is a well-made point. When I went round Hull and Doncaster
one of the things that was concerning me was that in the tenanted
sector the landlord was not responding very quickly. They had
insurance but it was two or three weeks down the track, maybe
longer, before they were putting in the claim, and so that was
an issue. Yes, confusion about who is responsible for the contents
and sometimes actually confusion about who owned the contents
as well, because often some of it is furnished.
Q425 David Taylor:
If a week is a long time in politics, two years is quite a long
time in the area of climate change, and in the last two years
we have seen some very significant events indeed. I guess the
Statement of Principles, whose second birthday is January 2008,
will be having substantial change when the review concludes. We
will come on to the review in a moment, but could you very briefly
summarise what you believe the insurance industry's commitments
are in terms of the Statement of Principles?
Mr Haddrill: The principal commitment
under the Statement of Principles is to make sure that we renew
insurance, or offer to renew insurance where someone is already
insured, for those properties where the risk is one in 75, as
Bridget was talking about, or better. Where it is worse than that,
we do not say no insurance, we say we need to have a discussion
with the householder about whether there is any remedial action
that can be taken to make it insurable. One of the things we have
found during the summer is that the insurance industry is doing
more than the strict letter of the Statement of Principles requires.
So that is our side of it. On the other side there was a commitment
from the Government to increase the level of flood defence expenditure,
which they did, I think, to our mind, quite satisfactorily after
the statement came in, but we are now more concerned that it is
not keeping pace with climate change and not keeping pace with
the additional risks that we have seen emerge in recent months
and years.
Q426 David Taylor:
Where the risk is more than one in 75 and no investment in flood
defence is planned, you as an industry reserve the right not to
renew, do you not?
Mr Haddrill: Yes, although some
people, in fact, it seems quite a lot of people, are still able
to get it in the market.
Q427 David Taylor:
This magic figure of one in 75, surely they are being reclassified
by the events as we experience and endure them, and it must be
extraordinarily difficult to come to any precise assessment of
what the real flood risk is with the climate that we are seeing
change almost before our eyes. Is that what is happening? Mr Mayer,
do you agree that these maps are artificially precise in terms
of the flood risk to which properties are exposed?
Mr Mayer: Yes, I do agree, and
you are getting at the crux of our business. We have to always
estimate what we think is going to happen, to assess the exposure
and the risk, and all we can do is always add new information
to that process. If I bring it down to layman's terms, all the
evidence that we have would suggest, as you have said, that the
risk is increasing, and certainly one of the things that we are
advocating, both as a company and as an industry, is the sharing
of as much information as possible, the gathering of new information,
so that we can all assess that risk better. I think that will
then, obviously, help government guide how it spends to defend
and it will guide us as an industry in terms of how we assess
price risk. I think in many ways sometimes people are afraid of
information. We have found that actually information helps you
be more certain and therefore provide more coverage to more people.
Q428 David Taylor:
In Mr Haddrill's opening comments, he started with approval for
the extra investment in flood management, and so on, which was
one of the Government's key actions, which were prerequisites,
almost, for your continued support of the Statement of Principles.
Could any or all of you say how you feel the Government is doing
in the other four areas that it committed to deliver on? Mr Haddrill.
Start with land use planning.
Mr Haddrill: Planning is a concern
to us. There has been legislation that gives more powers to the
Environment Agency and yet planning approvals are still being
given to major developments in high-risk sites. The Environment
Agency cites 13 planning approvals that were given against its
wish in 2006/2007, and we think that the Government should get
a bit tougher and make sure that becomes a harder process.
Q429 David Taylor:
Where planning approval is given in flood risk areas, do individual
companies, through the ABI, come up with some sort of collective
approach to the offering of flood insurance to those new properties?
Mr Haddrill: What we have done
previously is submit our own evidence to planning inquiries. Basically
we discuss and we consult with the Environment Agency and we tend
to support their position. I think that one of the challenges
for the industry is to promote and get clearer the consequences
for insurance if that development goes ahead. We have perhaps
been a little bit sotto voce and we need to raise our voice
on that. I would accept that. Another area of the Government's
commitment is about having a kind of strategic, joined up approach
to the whole flooding area, and that is something else where we
do not think sufficient progress is being made. It certainly has
come—
Q430 David Taylor:
I am sorry to interrupt. Strategic approach in relation to communications
and things like that, or in terms of integrated urban drainage?
Mr Haddrill: In relation to making
sure that the flood plain as a whole is understood, that there
is more certainty about what the risk is through the sharing of
information between various organisations, and then an integrated
approach, as you rightly say, to drainage, because that is certainly
one of the things that has come up over the summer.
Q431 David Taylor:
How much progress has it made, do you think, in the two years
since the statement came into force?
Mr Haddrill: I do not think it
has made really any progress at all in producing an institutional
change to deliver that strategic focus. That is certainly one
of the things we are looking for much more rapid progress on in
the future.
Q432 David Taylor:
So not a very positive score card so far, is it?
Mr Haddrill: I think there is
a lot that needs to be done. I think the Government has got the
message and some of the provisions that seem to be coming through
in the Climate Change Bill reflect that they are now placing much
more weight on sustainability through adaptation as well as sustainability
through mitigation, but at the moment I still feel that mitigation
is the much bigger story for the Government and more needs to
be done on the adaptation side.
Chairman: I just want to ask one
or two specific points on this statement. You said that it is
conditional on the Government making progress on these five key
action areas, one of which is reducing the annual probability
of flooding. By how much do you want to reduce the probability?
David Taylor: For which properties?
It is not a global one.
Q433 Chairman:
What do we mean by that phrase?
Mr Haddrill: What we want to do
now is to take a look at each of the high-risk flood areas, reassess
them to find out, in the light of what happened in the summer,
what a realistic probability is in those areas and then take look
at what level of investment in flood defences, and so on, is required
to get us as close as possible to that one in 75, one in 100 year
risk.
Q434 Chairman:
You are not answering my question. You said that the statement
is conditional on Government making progress. The question I asked
was: what is the probability that you are seeking? In other words,
you describe what needs to be done. I am interested in knowing
what the Government said to you they are actually going to do.
What is the level of probability of flooding you have asked them
to get to?
Mr Haddrill: It depends upon the
area. We are broadly looking for a one in 100 year probability
to be covered in most of the towns in the country.
Q435 Chairman:
So we have got the probability of one in 100. You also asked for
implementing reforms to land use planning in the context of flood
plains, and the Government still seems to be equivocating on that.
Have you had any cast-iron statements from them that give you
comfort in that respect?
Mr Haddrill: Not yet, no, we have
not.
Chairman: A not yet and a possibly.
Okay; David.
Q436 David Taylor:
I mentioned earlier, as did you, I think, that the Statement of
Principles is under review. At what stage are we in that process?
Are there any interim conclusions or findings which allow you
to predict the shape of some of the changes that might be made?
Mr Haddrill: We are at the very
beginning of the process. It has to be a very thorough review
this year, and I was pleased that the Government agreed to bring
forward the three-year review from 2008 to 2007. We expect the
review to go on into the spring, we need to be able to take account
of the Pitt Review in that, and we are at the early stages of
looking at these high-risk areas and trying to reassess the risk
as a result of what we have learnt over the summer.
Q437 David Taylor:
So is it at least possible that the review will produce a situation
where you will expect, as the Chairman said a moment or two ago,
much tougher and more specific commitments to be delivered by
the Government and you on your part may be reshaping the commitments
that you have given in relation to the one in 75 and one in 100
year risk?
Mr Haddrill: Yes.
Q438 David Taylor:
Could both of those areas be outcomes from the review?
Mr Haddrill: Yes.
Q439 David Taylor:
Tougher expectations of Government and tougher attitudes from
yourselves?
Mr Haddrill: I think it is absolutely
right that we need more from the Government, but we will be reviewing
our own position in relation to what comes out of the Government;
so the two have to go hand in hand.
Mrs McIntyre: We certainly want
to work in partnership to solve this issue. Michael asked earlier:
why do we want to continue to insure? We believe that if we can
work in partnership with the Government we can actually provide
a great service to customers when floods do happen, and if I look
at the way that as an industry overall we have worked to deal
with some of the flooding issues, we try to provide an holistic
service to customers to help them cope with what is a really unpleasant
situation. That is what we want to achieve through the work that
we are doing.
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