Water Bill

Written evidence submitted by The British Property Federation (WB 30)

1. The British Property Federation (BPF) is pleased to have the opportunity to put forward its views on the Water Bill and the clauses specifically relating to the flood insurance

2. We are the voice of property in the UK, representing companies, owning, managing and investing in property. This includes a broad range of businesses comprising commercial and residential property owners, housing associations and financial institutions including pension funds, corporate property owners as well as a number of regional landlord associations. A list of our largest members can be found at the following link: http://www.bpf.org.uk/en/members/our_members.php

3. Our response will outline our key concerns in relation to the Flood Re provision as set out in the Water Bill. We would be delighted to provide any further information or clarification on any aspect of our response on request.

4. Flood cover remains a key concern of the property industry with the insurance sector providing an ever increasing focus on seeking out solutions to counteract increasing claims costs. The property industry has, over recent months, experienced much uncertainty over the continued provision of flood insurance following the expiry of the Statement of Principles and as such we welcome the government’s proposal of Flood Re.

5. We agree and support Flood Re’s policy objective to ensure that domestic property insurance continues to be widely available and affordable in high flood risk areas. We also agree that the gradual transition towards risk-reflective pricing is a sensible suggestion but arguably it is imperative that this is based on robust local and regional evidence.

6. However, there are still a number of ‘design’ challenges in Flood Re, which require further consideration and whilst we appreciate that priority has been given to ensuring the availability and affordability of flood insurance in the residential home-ownership sector, the exclusions list seems to grow by the week taking a lot of property owners out of Flood Re, who would previously have been protected by the Statement of Principles. That being the case there needs to be deep scrutiny of whether such property owners will be able to obtain cover at a reasonable price, the consequences if not, and whether the insurance industry are making alternative arrangements for such property owners.


7. As highlighted in our original consultation response, we have expressed concern that SMEs are excluded from the Flood Re proposals, where previously they were covered by the Statement of Principles. Government has explained that given its emphasis on seeking a solution for residential properties, Flood Re would not be appropriate for the business community. Furthermore, there is a lack of evidence to justify their inclusion under the provision. We would argue that such evidence regarding the effects of flooding on small businesses does exist, and if flooding in small businesses is so inconsequential why exclude it? A report produced by the RICS in 2012 investigated the impact of flooding on SMEs and noted that following major flooding events, SMEs had seen a marked increase in their property insurance premiums and excesses, which had on average increased by approximately 1750% compared to pre-flood excesses. [1] SMEs are generally more vulnerable to the effects of flooding compared to their larger counterparts and without sufficient reserves to fall back on face greater exposure to the effects of flooding. As SME are often the lifeblood of many communities, if they recover slowly from flood events it can have significant knock consequences for the wider community affected.

8. We recognise that businesses reflect a different risk to residential property and as such Flood Re may not be the appropriate form of protection for them. However, we would urge government to ascertain the evidence it needs and gather the data in support of that evidence as quickly as possible in order to establish the appropriate form of flood provision for SMEs.

Buy to Let

9. We are becoming increasingly concerned that all buy to let landlords, accidental and hobby landlords will also be excluded. This exclusion had not previously been mentioned in the original consultation and we are alarmed to see that it has been added within the government’s response. Excluding all investment property from Flood Re will have a major adverse impact on the sector, particularly for smaller landlords who will face a huge financial burden if they are unable to obtain cover, or can obtain it but with the full risk of flood priced in. Flood doesn’t discriminate between owner-occupiers and renters and if a property is damaged the immediate priority is to restore somebody’s home. If landlords are unable to insure their property against flood, or the costs prove prohibitive, re-habitation will be a longer drawn out process, with consequences for not only the renter, but also other bodies such as local authorities who will have to find temporary housing arrangements. The problem of attributing responsibility for dealing with uninsured risks as between landlord and tenant is an extremely difficult issue in the commercial property sector. It would be a retrograde step to encourage similar difficulties to be introduced with regard to the risk of flood in the residential investment sector.

10. A further consequence of not being able to obtain insurance will be the impact on the validity of landlord’s mortgages. The CML has already expressed concern on this issue and it is one which we would echo. A large number of residential lenders insist upon flood insurance as a condition of the mortgage. Without the appropriate insurance in place, landlords may well breach the terms of their mortgage agreement with their lenders. Furthermore, there is the potential risk that borrowers may well default on their mortgage payments as a consequence of trying to meet the costs of repairing uninsured damage. Further, mortgages of properties where flood insurance is not available or properties which have been affected by flood, may see the security value of their mortgage book eroded, resulting in the capital adequacy of such mortgagee being impaired.

11. It is unreasonable to assume that landlords with buy to let property or properties which have been let as a result of some other circumstance are themselves in a good financial position.  Many will have large mortgages and other financial commitments that are part and parcel of being a landlord. Other than some high level principles, the designers of Flood Re, have not well articulated why such an exclusion is necessary, the practical consequences of them, and the alternatives open to those covered by them.

Band H Properties

12. We are concerned with the decision to exclude Band H properties and as highlighted above, it is simplistic to assume that homeowners living in such properties are financially better off and therefore able to afford higher insurance premiums. Whilst an owner of a Band H property may be asset rich, this will not necessarily translate into income rich and as such affordability of insurance may well be as much an issue for such owner as for owners of lower band properties.

13. Furthermore, if insurance cannot be accessed, a lender is unlikely to agree to mortgage an uninsured property regardless of its value. This will ultimately impact the value of the property and subsequently place further financial burdens on the owner.

December 2013

[1] RICS Research: Impacts of flooding on SMEs and their relevance to Chartered Surveyors, September 2012

Prepared 18th December 2013