Examination of Witnesses (Questions 440
- 459)
WEDNESDAY 28 NOVEMBER 2007
MR STEPHEN
HADDRILL, MR
IGAL MAYER
AND MRS
BRIDGET MCINTYRE
Q440 David Taylor:
You say that, and I am sure you are genuine in saying that, but
there are cynical observers, none of whom are members of this
Committee, who believe that the industry is looking for a get-out
and wanting, in some circumstances, to abandon their commitment
to provide broad-scale flood risk insurance. In what sort of circumstances
could you envisage the industry starting to backtrack? How fluid
are your intended principles?
Mr Mayer: I have got to clarify
that. From our perspective some of these comments are being taken
out of context. Very simply, we entered the principles in a pretty
simple understanding. If the risk is a one in 75 or less, that
becomes an insurable risk at an affordable price and the industry
will continue to provide coverage.
Q441 David Taylor:
This is risk as calculated by the Environment Agency with its
various sources of information?
Mr Mayer: We knew at the time
we signed the Statement of Principles that there were actually
many properties in the UK where the risk was far greater than
one in 75 because the flood defences were not sufficient. I will
suggest to you that I think every time an event happens we learn
more, and I certainly think from the events of this summer we
have learnt that maybe the flood defence systems are even more
vulnerable and not as robust as we thought they were. The industry
is simply looking to work in understanding where that risk is
and then to see a plan that brings that risk down to an acceptable
level, and acceptable, I think, translates into affordability.
We can insure a one in ten risk, but a one in ten risk is going
to have a much greater price than a one in 75 because you expect
it to happen once every ten years. It is that simple.
Q442 David Taylor:
About 2.2 million properties are in existing flood plains, we
are told, and about 15 per cent of those have a greater than one
in 75 chance of flooding.
Mr Mayer: Right, and I do not
think the industry was looking to—
Q443 David Taylor:
To backtrack from the support of properties?
Mr Mayer: Yes, the industry was
not looking to backtrack and the industry was not looking, when
we signed the original Statement of Principles, for an over-night
solution, but we were looking for progress to be made and I think
it is appropriate to review how much progress has been made and,
in the context of changing weather patterns, whether the plans
are sufficient. Mr Haddrill is promoting that on behalf of the
industry, that we want that review and we want that transparent
discussion.
Q444 David Taylor:
One final question from me, Chairman. There is regular reference
to homes and small businesses. What is your upper limit on small
business definition?
Mr Mayer: I am sorry "upper
limit"?
Q445 David Taylor:
There is a reference in the commitments to continued offers of
flood insurance to "homes and small businesses". I wondered
what is the upper limit of small businesses, or is that just a
phrase that is meaningless and you threw in because it sounded
good?
Mr Haddrill: The Statement of
Principles we see applying to homes, not to commercial insurance.
Q446 Mr Drew:
The issue of types of payment that you made, as I say, there is
a background to this. I went to a conference, which was very useful,
a couple of weeks ago now, which was organised by ABI and the
statement by one of the insurance companies represented—it
may have been SunAlliance—was that you currently have cross-subsidised
the payouts in the sense that you have not recouped that money.
You are currently allowing that money to sit there until you come
to an eventual calculation of what the true cost is. Is that true?
You have not sought to recoup yet all the moneys from the cost
of the floods.
Mrs McIntyre: When you say "recoup",
recoup from?
Q447 Mr Drew:
I am not making it very clear. What I am saying is that in terms
of the payouts you have made, you have had to accept that you
have done that at a loss. There is no way at the current time—
Mrs McIntyre: No, no, no. Yes.
Q448 Mr Drew:
---that you have managed in any way to put up premiums that would
recoup that money. That is true?
Mrs McIntyre: In the way that
we look at our pricing, we price in flooding. So within the risk
premium that we charge customers we already have a loading for
flooding costs and the statement that we have made accompanies
that we will not be putting any blanket increases in as a result
of this.
Q449 Mr Drew:
What I am trying to say is, in terms of the cost of these current
summer floods, that is way beyond the money that you put aside?
Mr Mayer: In any one year, that
is correct.
Q450 Mr Drew:
Is there any ball park figure that you can give us? How much has
it cost you and how much of that would you expect it to cost you,
roughly?
Mrs McIntyre: We have declared
as an industry the cost is three billion, and we have as a company
talked about a cost of 120 million net, the cost of the insurance—so
that gives you an idea of the scale. Is that the kind of number
that you are thinking of?
Q451 Mr Drew:
The actual breakdown of the ways in which the money you have paid
out has been distributed, to what extent have you looked at the
distribution of the costs? For example, how much has been paid
out in terms of what I would call natural flooding, as against
flooding from sewers, as against flooding from third-party incidents?
Have you done that level of work yet at a collective level? Obviously
you have had to do it at an individual level. If so, I think it
would be quite useful for the Committee to see that, but, again,
give us a feel for those figures and what you think you have learnt
from that.
Mr Mayer: I do not believe at
this stage we have the kind of granularity that you are looking
for and, frankly, that would be useful for us as well.
Q452 Chairman:
They are available as consultants, you know. These are good questions.
Mr Mayer: They are great questions.
Q453 Mr Drew:
Have you any idea when that will be done?
Mr Mayer: Let me make a couple
of broad statements to see if this is what you are looking for.
When we look at the two events, I think there is some insight
to be gained and really two different stories. If we look at the
June event that hit Hull and Sheffield and the surrounding areas,
that was an event that we would not have typically expected and
the flood mapping would not have accounted for because that was
essentially a massive downpour of rain and overland water with
the drains not being able to cope with it. So, broadly speaking,
I think you can look at the first event and say that was due not
to rivers flooding, it was due to just a huge amount of rainfall
and the drainage system not being able to cope with it. The event
in Gloucestershire, Tewkesbury, that was more what we would have
expected, it was more what the flood mapping and all the work
that we have done and you have done would have predicted. I do
not know if that helps. Broadly speaking, Stephen, if we take
the two events, I think we are roughly close to 50:50 on the three
billion.
Q454 Mr Drew:
I suppose what I am trying to get at, not very clearly, is the
degree to which you now will break down the real causes of the
floods which will then mean that you will do the numbers and say,
"We have under estimated the risk of this type of flooding
but we were able to meet the costs of this other type of flooding",
and to what extent do you then go back to government in particular
and say, "Look there is a gap here, because there is no way,
unless we are going to put premiums up for certain categories
of people dramatically, that we can meet that shortfall"?
Mr Haddrill: It is that sort of
analysis that we are aiming to do. Perhaps I should say, it cannot
be a perfect science. As we have seen over the summer, we will
never know exactly what is going to happen in any one flood area,
but that is the intention. I do not think I should let the word
"dramatically" pass in terms of premiums. Some people
were worried that we were looking at very high percentage increases,
and I do not think that is what I have heard from any part of
the market, so I do not want to be alarmist about that.
Mrs McIntyre: You asked the question
around lessons learned, for example, around Hull. I think we have
had across statistics of about 75 per cent, and if you would like
further information on the breakdown, I think we could provide
it, because as companies we are doing that analysis. The drainage
issue clearly has come out as something that we did not predict,
as Igal said, and I think the question we have around that is
what can be done. Would storm drainage work? Would storm drain
work be something that could be a solution? What is the solution
to that to deal with these heavy monsoon type rains, and that
is the climate change effect that we are seeing. If I look at
some of the events we have had over the last two years, it has
been that monsoon type rain through the summer that has surprised
us in terms of our drainage systems' ability to deal with it.
Q455 Mr Drew:
Can I deal with the issue of premiums and then I will come back
with a final question. How much will you try and spread the cost
of this as against realising that there are some properties that
either you would prefer not to insure at all or, if you are going
to insure them, then the premiums will have to be substantially
higher? Is that something that you are as yet discussing? You
have done it in the past, but this has got an added piquancy because
of the amount of properties and the level of disruption there
was. I wonder where you are in your stage of discussion of those
issues?
Mr Mayer: I think it is an individual
company decision. David, I think you have two elements. You have
got, in our view, a need for the overall pool of premiums to be
sufficient, the premiums of the many to pay the losses of the
few. So, there is no doubt that there is an effect overall.
Q456 Mr Drew:
That is the principle of the shared risks?
Mr Mayer: Yes, and that is insurance,
that is what insurance is about, but I would expect certainly
our company and other companies to look at specific actions in
specific areas. I would emphasise Mr Haddrill's point. I think
we have got two things. We have got a dynamic and competitive
market place and, as of yet, we have seen no one take dramatic
action.
Q457 Mr Drew:
Could I add one rejoinder, which is another issue that we have
not really looked at but I think we need to, and that is, of course,
you do insure a number of the public utilities in one way or another.
Without going into too many details, I have got an issue at the
moment where someone is trying to take legal action against BW
over a breach in the canal. Give us a feel for how you would approach
that from the perspective of being an insurer of BW, and is that
something that could in its own way have quite a dramatic effect
in terms of the public sector premium payments that they will
have to make in the future?
Mr Haddrill: Certainly it is absolutely
true that we were concerned that some public authorities seemed
to be self-insuring rather more than we would think was wise.
Self-insurance for a public authority is perfectly reasonable
if you have assessed the risk properly and you feel that you can
then bear that risk in almost any circumstance. Public authorities,
I do think, need to revisit that question. I also think you are
absolutely right, particularly about what happened around the
West Country area where we had massive interruption of business,
if you like, as well as of people's lives, as a result of actions
that have been identified in previous reviews. The need to protect
electricity substations, and so on, have not really been taken.
We have seen time and time again in these floods that police stations,
ambulance stations, schools and so on have been flooded. They
are there in the flood plain, they are essential parts of the
local community.
Q458 Mr Drew:
You are in a slightly difficult position in the sense that where
on the one hand you have customers who you would like to recoup
money from, a negligent authority, if you are also the insurer
of that so-called negligent authority, you are in a lose-lose
situation and you have to be very careful that you are not seen
to be taking sides. That is real problem, certainly in my part
of the world.
Mr Mayer: I do not think it is
unique to the flood situation. In our business we take care of
our customers first, but then there is often a dispute over the
negligence of which party is responsible, and that is what the
legal system is there to take care of. We often find ourselves
on both sides. Mrs McIntyre and I will be on either side of many
disputes in courts or we will settle among ourselves. I think
that is normal. I do not think it is a feature of the flood specifically.
Q459 Mr Williams:
In 2005 the Government published Making Space for Water, which
is bringing together recommendations from previous flood incidences.
I think you have said that the recommendations there were not
only unfunded but the organisational changes that were required
to address those issues had not been made. I think Baroness Young
said that the Environment Agency was making progress but was not
moving fast enough. Do you believe that the recent floods have
given us any new lessons to be learned or is it just the same
lessons from the previous flooding incidences?
Mr Haddrill: I think some things
have gone up the agenda. Flash flooding has clearly gone massively
up the agenda. It is not something we were unaware of before,
but it now looms very large. Therefore the organisation of public
authorities and the water companies and so on around flash flooding
needs serious attention. I would say that is the big thing that
has come about.
Mr Mayer: For me, Mr Williams,
another big one that I think is the sooner we take the lessons
learnt and apply them, as Mr Haddrill spoke about, on the planning
side. We have a government that is committed to increasing the
housing stock and I think there are sensible things that can be
done. Obviously our first priority would be to avoid flood plains,
but we are not naive. If we have to build on flood plains we think
there is action that can be taken, for instance, to strengthen
the building codes, to insure some simple measures around making
homes more resilient to flood and reducing the damage; really
simple stuff to me like electrical sockets being placed halfway
up walls in new construction that would avoid electrical damage
seems sensible, easy, low cost, and I think there are a number
of other things that we can do and should do to address the issue
of the increased exposure while at the same time meeting the needs
of increasing the housing stock.
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