Water Bill

Written Evidence submitted by the British Insurance Brokers Association (WB 02)

1. The British Insurance Brokers Association (BIBA) is the UK’s leading general insurance organisation representing the interests of insurance brokers, intermediaries and their customers.

2. BIBA membership includes just under 2,000 regulated firms having merged with the Institute of Insurance Brokers (IIB) in November 2011.

3. BIBA helps more than 400,000 people a year to access insurance protection through it’s Find a Broker service, both online and via the telephone, including specialist flood brokers who can insure the vast majority of flood impaired properties.

4. Brokers provide professional advice to businesses and individuals, playing a key role in the identification, measurement, management, control and transfer of risk. They negotiate appropriate insurance protection tailored to individual needs.

5. BIBA have committed to work closely with Government on solutions for flood insurance which remains a key priority in our manifesto.

6. BIBA and our members have been trying to help facilitate a solution to provide availability and affordability of flood insurance for UK property owners in the long term.

7. Our members Aon, Marsh and Guy Carpenter have been heavily involved in the discussions over the last few years. The Guy Carpenter/ Marsh proposals are still valid propositions and we suggest the Scrutiny committee contact them about their options if appropriate. We submitted our response to the DEFRA consultation ‘Securing the future availability and affordability of home insurance in areas of flood risk’ on the 8th August.

8. BIBA’s views on the Government response to the consultation are mixed.

9. We agree with the Government’s policy objectives to provide availability and affordability of home insurance.

10. We would prefer the Flood Re option to succeed rather than the Government resorting to the "Obligation".

11. BIBA is working with our members to increase the number and availability of flood insurance products for customers in case Flood Re does not succeed.

12. We are pleased that the proposal is to cover both buildings and contents insurance and limits the excess.

13. BIBA members retain a number of challenges that must be overcome for Flood Re to succeed. These are:

14. Small Businesses
The existing Statement of Principles (SOP) currently covers small businesses (with up to 49 staff) for property flood insurance risks. BIBA members are very concerned that the Governments response does NOT afford this protection for small businesses going forward. Most small businesses will buy a commercial package insurance policy which is in the name of the business and not the private individual, therefore, making it ineligible for Flood Re protection. This is of particular concern to BIBA where it involves properties where the occupier also lives e.g. bed and breakfast and public houses. We have additional concerns for the Let property market as well. This is a retrograde step.

15. BIBA propose a compromise that allows for micro businesses to be included within Flood Re in the following definition.

BIBA recognises that businesses present different risks to domestic properties and it may not be appropriate to include these within the Flood Re proposals in a similar way to the statement of principles (up to 49 staff). We believe however, that at micro level these risks are more aligned to domestic properties especially as in many cases the insured will reside on the premises. Our suggestion therefore is to call for the inclusion of micro businesses including sole traders, partnerships, limited companies with up to 10 staff and/or turnover of up to £1m. We envisage that both individual landlords with policies covering let domestic properties and commercial landlords covering similar properties would both come within the criteria (subject to the number of staff and turnover criteria).

16. We have evidence from BIBA members that small businesses are experiencing difficulty obtaining affordable property insurance due to the risk of flooding. Examples of this are as follows:

Policy type

2012

2013

Comments

Package

£1,700 premium

£5,000 or 10% flood excess

£1,900 premium ex flood or £7,500 inc flood with expiring excess

Only holding company would offer terms under SOP

Package

£1,120 premium £5,000 or 10% flood excess

£3,500 premium ex flood or £7,000 inc flood with expiring excess

Only holding company would offer terms under SOP

Package

£5,000 premium £5,000 or 10% flood excess

£10,000 premium ex flood

Only 1 market

Package

£2,900 premium £5,000 or 10% flood excess

Same

Only 1 market

Package

£770 premium £5,000 flood excess

£1,300 premium ex flood £1,500 £20,000 flood excess

Only 1 market

Property owner

£2,099 premium £5,000 or 10% flood excess

Terms o/s

Marketing ongoing

17. A BIBA broker in Cumbria has highlighted that there are still empty shops in Cockermouth which demonstrates the hesitancy of businesses given the insurance costs and insurers lack of appetite to write flood cover.

18. We believe there needs to be a greater definition of what is IN and what is OUT.

19. For example: Landlords with tenants – This is a mixed situation as the Landlord is "Commercial" but the tenants contents are private and fall within a household risk.

20. Flood Re

21. Council Tax band rating

The insurance industry already has a system so that those living in cheaper properties pay less. The use of the number of bedrooms for rating along with a rate per cent on the sum insured already achieves risk based pricing.

22. We believe that there will be a significant burden with the changes required to software programmes used by brokers and insurers to elicit this information. There is also the issue that not all properties have a council tax rating e.g. unoccupied uninhabitable property and Northern Ireland properties.

23. We also disagree with the exclusion of Band H property. Just because it is band H does not necessarily relate to the affordability and ability to pay. And it could still be very difficult for a band H property to seek flood insurance.

24. We also do not believe there are that many band H properties in comparison to the other bands and therefore do not believe their inclusion should have any major overall impact.

25. Therefore we believe that band H must be included.

26. BIBA are also of the view that if this is designed to help those on lower incomes there should be a greater pricing differential in the lower bands, (particularly between bands A and B)as the range of prices across the bands A to G is not skewed enough.

27. We suggest looking at other methods of helping lower income households and suggest consideration of a simple system of utilising existing rating factors and having a simple cap on the sum insured. This would mean that lower value houses would be eligible for support from Flood Re more easily than those with a higher sum insured, this should address the aspect of those in lower income percentiles.

28. Properties built since 2009
We disagree with 2009 as the cut-off point, instead we believe that the cut off should be 2013 as per the last 4 years those properties have been required to be built in accordance with Policy planning statement 25. (PPS25) We believe there does have to be a cut off to ensure that between now and the introduction of the new flood agreement, future new building projects are arranged in a resilient manner.

There must be a more resilient and robust planning process and the problems that currently exist with PPS25 must be eradicated.

29. Genuine uninsurable properties?

We strongly disagree with the genuinely uninsurable property proposal.

30. From the DEFRA press release on 27th June The Right Honourable Owen Paterson stated (Paraphrased).

31. "This announcement means that people no longer need to live in fear of being uninsurable and that those at most risk can get protection, now and in the future".

32. Clearly BIBA do not believe this to be the case as in fact there are many exclusions including this issue of genuinely uninsurable properties.

33. In addition at the second reading of the bill on 25th November Owen Paterson also said: 25 Hansard extract Nov 2013 : Column 50 ensure affordable flood insurance for households in areas at high risk of flooding. 25 Nov 2013 : Column 56. We need to give people at high risk of flooding the certainty that they can continue to get affordable flood insurance, as was touched on by my hon. Friend the Member for The Wrekin (Mark Pritchard). We consulted on draft flood insurance proposals over the summer, and I know that hon. Members agree that a solution is essential for the continuing protection of people at high risk of flooding. We are still in intensive and constructive discussion with the insurance industry on some of the finer points of detail, but we plan to table new clauses in time for consideration in Committee. The powers in the Bill will help to ensure that affordable flood insurance is available for households in high-risk areas.

34. Despite Owen Paterson’s comments above we do not think they are reflective of the facts due to many exclusions within the Government’s response. (Genuinely uninsurable properties, Band H council tax and properties built since 2009).

35. We are concerned at who would have the right and ability to decide what is genuinely uninsurable, how would they decide and how often would this be reviewed? Situations constantly change with new defence schemes and individual property level protections being added. We think this agreement must pick up all postcode rated domestic properties in the UK.

36. We do not believe there are that many properties in this category.

37. BIBA has a definition of what is an insurable property.

38. BIBA believes that all post code rated domestic properties in the UK should be included within Flood Re. If the property has a council tax band and council tax is being paid, then it should be insurable. This would remove any doubts about insurable interest. Whether a property is occupied or unoccupied for council tax is irrelevant as a landlord may well have an unoccupied property that they are still keen to insure because of its value. Potentially unoccupied properties could be offered buildings insurance only.

39. Contingent Liability
If there is a very large loss, e.g. an East Coast flood, then the £2.5 Billion proposed reinsurance limit could be breached. We need clarity over what would happen in this situation would it be the Tax payer, the property owner or the insurer who foots the bill.

40. The Levy
As it is proposed for band H properties not to be included in Flood Re, would they be expected to pay the levy?

41. Some Insurers have very little exposure to flood risk in their portfolio at the moment, but a subsidy across the market, rather than across a portfolio could see those more cautious insurers being subject to a significant additional new cost. However we agree with the principal that you have to have a levy in order to deal with the affordability issue.

42. We remain cautious that the levy could increase significantly in the future due to external pressures such as climate change in years to come.

43. Summary of the Flood Re challenges
It requires approval from the European Commission,

It should cover small business like its predecessor the SOP

Doesn’t cover new homes built after 2009

Doesn’t cover "genuinely uninsurable properties"

Doesn’t cover council tax band H properties

The -£196M cost for Flood Re outlined in the impact assessment is the most expensive in comparison to option 3 (+£191M) and option 4 (+£43M)

44. If these issues can be resolved then we are confident that Flood Re should achieve the Government policy objective for flood insurance.

45. We also believe that if Flood Re is designed to end in 20-25 years time (when its expiry leads into a free market) that the subsidy and the impact on premium affordability help should reduce gradually over this period, perhaps every 5 years.

46. The Obligation
BIBA would be concerned that if an Insurer had no choice under the obligation other than to insure a given quota of flood risk properties then Government could seek to reduce their levels of flood defence spending.

47. The obligation would be the first time that Insurers are forced to provide a type of cover to a high risk home owner or occupier that they otherwise may have chosen not to insure. This would create a situation that some Insurers could withdraw from the market, reducing capacity, competition and choice and introduce cumbersome regulation.

48. BIBA would be concerned that if Insurers had no choice under the obligation other than to insure a given quota of flood risk properties then Government could seek to reduce their levels of flood defence spending.

49. It is questionable whether the obligation can achieve affordability.

50. Exempting firms from the obligation

In the interests of a level playing field BIBA believe that it is right all insurers have the same obligation, however the regulator could obviously tailor their supervision in a proportionate manner according to the risks posed by individual insurers.

51. The Environmental Agency should be granted powers to act as a ‘lead administrator’ working with the devolved administrations to compile a UK-wide register that lists by address each domestic property at high risk of flooding

52. This should be freely available to the industry and their customers.

53. We would disagree with the term ‘register’ and instead suggest it be called a flood insurance qualification so it is a positive rather than a negative.

54. Signposting

Brokers are the agent of the customer and the Insurer and are normally able to find solutions for properties at the highest risk of flood. Of our 2000 members, BIBA has 113 who specialize in flood risk properties. We have been involved in the Pitt review and the Treasury and DEFRA flood Working Groups, met with the Flood Minister Richard Benyon, spoken at the DEFRA flood summit and given evidence tothe EFRA select committee.

55. We believe that once the Statement of Principles expires, the majority of property owners (98%) will continue to access flood insurance in the normal way with Insurers providing cover as part of the standard bundle of perils.

56. The 2% of highest risk properties is where there is most concern as these are the properties that are often red lined and rejected by an internet comparison site who are providing products for standard homogenised risks, not for non-standard high risks.

57. This is where BIBA’s not-for-profit Find a Broker ‘signposting’ service can play an important role in helping people access suitable cover.

58. Signposting is a way of helping consumers who are refused insurance cover at the point of sale. If an insurer or insurance broker is unable to offer cover, then they will automatically refer them to a more suitable alternative provider or to BIBA’s Find a Broker service, which matches them to a specialist flood insurance broker, who can more easily accommodate their enquiry.

59. Through effective signposting, if no solution is found, BIBA are still confident most homeowners will still have flood cover available through brokers. In research with our members we have seen our members cover 95% of the Insurer rejections.

60. Here is an example of a flood risk property that a broker insured at an affordable rate.

Tiverton EX16 – Mapped as be prepared on EA. Property is 3-400m from the River Exe

Property and area has never flooded Previous insurer was excluding flood cover. We have offered and incepted cover for buildings, contents and personal possessions including flood at normal terms. Premium charged 394.29. Minimum security applies

61. Summary

62. A summary of our key issues are:-

63. BIBA agree with the Government’s objectives for domestic properties.

64. During the interim period we recommend a system of signposting be formally created in order to help people more easily access insurance for their flood risk property. BIBA would be happy to assist in the way that we have done with the "age" agreement.

65. Small businesses in flood risk areas do sometimes have difficulty in accessing flood cover. They have always been protected in the previous SOP and we believe they need to be included a solution going forward.

66. BIBA suggest consideration of a simple system of utilising existing rating factors and having a simple cap on the sum insured. This should address the aspect of supporting those in lower income percentiles. We also disagree with the exclusion of Band H property.

67. We disagree with 2009 as the cut-off point, instead we believe that the cut-off

- should be in 2013.

68. We strongly disagree with the genuinely uninsurable property exclusion.

69. The -£196M cost for Flood Re outlined in the impact assessment is the most expensive in comparison to option 3 (+£191M) and option 4 (+£43M).

70. The level of subsidy and the impact on premium affordability support should reduce gradually over the 20 year period, perhaps every 5 years. To ensure that the impact of a free market does not lead to massive increase in someone’s premium.

71. Under the obligation, BIBA would be concerned that if Insurer had no choice other than to insure a given quota of flood risk properties then Government could seek to reduce their levels of flood defence spending. This would only give insurers a reason to withdraw from the market.

72. The obligation could lead to a reduction of capacity, competition and choice.

73. The FCA should be the regulator if there were to be an obligation.

74. Flood Re requires primary legislation.

75. Flood Re requires approval from the European Commission, a significant hurdle.

76. Flood Re should apply to both buildings and contents.

77. The £2.5B limit that could be breached by a super flood.

78. PPS25 must be more robust.




November 2013

Prepared 4th December 2013