Environment, Food and Rural Affairs - Minutes of EvidenceHC 330

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Oral Evidence

Taken before the Environment, Food and Rural Affairs Committee

on Tuesday 26 February 2013

Members present:

Miss Anne McIntosh (Chair)

Richard Drax

George Eustice

Barry Gardiner

Mrs Mary Glindon

Neil Parish

________________

Examination of Witnesses

Witnesses: Otto Thoresen, Director General, Association of British Insurers, and Angus Milgate, Managing Director UK and Ireland, AON Benfield, gave evidence.

Q167 Chair: Good afternoon and welcome. May I thank you both very much indeed for joining us? Just so you know, Marsh had been invited and at the last moment were unable to join us today. They will be joining us later. Could you introduce yourselves and give your positions for the record?

Otto Thoresen: I am Otto Thoresen. I am Director General at the Association of British Insurers.

Angus Milgate: I am Angus Milgate and I am Managing Director for AON Benfield in the UK and Ireland.

Q168 Chair: Thank you very much and thank you for participating in our Flood Funding Inquiry. Can I start by asking the ABI, where are we at the moment, would you say, in the progress towards replacing the Statement of Principles?

Otto Thoresen: That is a big question to open with. We are in what I would call constructive discussions with Government. The discussions have been going on for quite a long time, it has to be said. I first became involved in this almost two years ago when I joined the ABI in April 2011. At that point there had been discussions going on with Defra on how the Statement of Principles could be replaced. Those discussions have continued. We were just discussing this as we were travelling here from Gresham Street. We have spent quite a bit of time, from about a year ago, getting into some detail around the Flood Re model, which we have described in our submission.

Chair: We are going to come on and ask you about that in more detail.

Otto Thoresen: I am sure we will come on to that later. Those discussions seemed to get to a position where they were no longer moving forward around about October or November time last year. We can discuss later why that might have been and what caused that process to stop. From the early part of January we have reengaged with Oliver Letwin, representing the Government, and I would say that the discussions we have had have been constructive from early January to this point, but still with some significant issues under discussion.

Q169 Chair: Representing the insurance industry, are you convinced that the industry is prepared to take the level of risk the public would expect it to take in this proposal?

Otto Thoresen: It is difficult to answer that question without going in to the model we propose, how we think it should work and why we think it is a good model. Perhaps I could just say a few words about that. The Flood Re model we have proposed is a mechanism to deal, on a sustainable basis, with the insurance needs of the market as a whole, households as a whole, and also the 2% or so of properties that we would describe as high risk.

The Flood Re scheme creates a notforprofit flood insurance fund, which effectively formalises the cross-subsidy that already exists within the operation of the flood insurance market under the Statement of Principles. Ninety-eight per cent. of the market would operate in a free market way, so the competitive pressures that work in a free market to get good value for households and consumers would operate freely but for those properties that would be high risk-the 2% that would fall within the fund-essentially we would provide flood cover at a set price. Clearly, all of these parameters can be moved to create different outcomes and I suspect we may discuss that a little more in detail shortly.

We believe that that process means the model can adapt and evolve, but to make the Flood Re pool have sufficient assets and money within it to cover the liabilities, we would formalise the cross-subsidy that exists at the moment through a levy on the insurance industry, which would pay additional money into that pool. I can talk a little bit more about the kind of events that the pool should be able to sustain. There is a contingent liability within the pool, though. The thing about flood insurance and flood risk is that it is a very volatile risk. You can have a number of years where the flood risk is very modest or very low and then you can have experience where you have significant spikes in that.

The model we describe can provide cover in most eventualities. There could be two causes where the flood pool would not be sufficient. One would be where you had a significant event in the early period of the setting up of the flood pool, because clearly the flow of money into the pool would be relatively low at that point. That would be a temporary issue because the expectation would be that, in future years, future flows of money would cover over that short term overdraft requirement. At the other end you would have, depending on how you structure the scheme, a point at which a very significant catastrophic event would exhaust the coverage of the pool. That would be a situation where, essentially, we would have very significant issues across the country as a whole. Within that model we believe the industry would be able to continue to provide affordable and accessible cover to the market in the UK.

Q170 Chair: We would like to explore that model through the course of the afternoon. Colleagues will open that up shortly. There are two ways to proceed. One is that the reinsurance sector, the NOAH Marsh model, would take up that slack and the gap you have identified. The other model could potentially be-and I presume you are exploring this-the possibility of the Government coming in with some Government funds. About a year ago the Prime Minister, for the first time, spoke in terms of hypothecation and talked about future roads being built using road taxes. I understand that was the first time we have ever sought to use money dedicated for one thing actually for, in this case roads, to build new roads. Would you see any merit in taking a percentage, in that early part of the scheme, to enable the scheme to get up and running in case there was a significant event in the early years, that you have just described, of taking either a percentage or indeed the whole 6% of the insurance premium tax that each and every one of us pay on our household insurance, contents insurance and buildings insurance policy. Would you believe that that form of hypothecation could plug the gap in the funding that you have identified?

Otto Thoresen: I will try to answer that in two steps. My first step would be to say that we have put together the Flood Re model on the assumption of the environment in which we are operating. Nobody can predict with certainty what the flood experience of the UK will be over the next 10 or 20 years but we have a view about the current environment. In the current environment we believe we can build a model that will operate in a way that is a formalisation of the existing cross subsidies in the market to deal with the issues and address the cashflows into the Flood Re insurance pool.

What we cannot cover through that on a commercially sensible basis, and that is a sensible basis for the consumer in terms of price, is to extend that level of cover-Angus might be able to help me out here when we talk about the reinsurance component-right up to cover the most extreme catastrophe that we might have to face. Where we believe there is a line you have to draw is on the contingent liability at that extreme end. As to how one chooses to raise the floors that you have to bring in to the pool, and whether you do that through a levy on the insurance industry-which is our proposal because that essentially formalises the existing set up and keeps it within the system-or you do it through some other means, is something that I do not want to dismiss as a detail but, for me, you have to get to the point where you are willing to accept the construct in the first place before you decide the most effective way of making the construct work. At this point the argument is about the construct.

Q171 Chair: Mr Milgate, is there anything you would like to add?

Angus Milgate: No, I will pick it up later on if you want to ask a specific question on that.

Q172 Barry Gardiner: First of all I should state my interest. I am an Associate of the Chartered Insurance Institute and a chartered insurance practitioner. I think I still am; I do not think I have renewed my subs actually.

Chair: They will be after you.

Barry Gardiner: They are going to be after me now; I should not have done that. You have set out very clearly the Flood Re model. Could you perhaps, just for the benefit of the Committee, set out with equal clarity the NOAH model? Could you draw out, for the Committee, the key distinctions that you see between the two?

Otto Thoresen: The first point I would make is that I have been an insurance man for 40 years but I am not a general insurance specialist and I am certainly not a reinsurance specialist. What I will talk about are the differences in the way the NOAH model is constructed. I would characterise the NOAH model as being a reinsurance solution for insurers who no longer wish to take flood risk on to their own balance sheet but want to continue to participate in the household property insurance market. The reinsurance component of NOAH is very clearly there to cover the volatility and risks in the market, but the difference with the NOAH model is that it does not give you any degree of confidence or control over affordability for the high risk properties because the NOAH model is essentially a risk based model. The second aspect of it-and this is not to suggest that this is an issue that could not be dealt with-is that it does mean that the control over the price and the negotiation around the price for flood risk in the UK sits with one organisation, who are running the NOAH pool. In that sense, you lose some of the significant benefits that come with a free market operating for as large a part of the overall market as possible.

Q173 Barry Gardiner: What you are saying is that it is a land grab by Marsh Mac or, more accurately, a flood grab by Marsh Mac?

Otto Thoresen: I would never use language like that. I think it is important for the rest of the discussion here. I talked to Marsh through most of last year. We have different opinions about how best to deal with this issue. More recently those discussions have continued and actually there is a new CEO at Marsh. We have opened up discussions again, and I am going to talk with them again later this week. I do not think we should see it as an either/or. The question we have to ask ourselves is what it is that we seek to achieve here for UK citizens in replacing the informal arrangement we have through the Statement of Principles with something that is sustainable, gives people far more confidence about where things are going to go in the future and can adapt to circumstances. Those circumstances might be negative, in the sense of increased levels of flood experience, or they might be positive because Government flood defences begin to establish an environment that is more manageable and more controlled so the risk begins to fall away. It is an adaptable model. We believe that the Flood Re model offers access to insurance solutions for the population that we are concerned about. We would argue that the Flood Re model should be a very transparent model, a notforprofit model and one where Government has oversight over its operation. There is an element of independence in the governance over its operation, because it is very much a notforprofit model for the high risk properties. Through that mechanism you can manage the pricing for those higherrisk people who have big exposures.

Q174 Barry Gardiner: Indeed. You are touching on what, for many of our constituents, will be the critical issue, which is cost: how much it is going to cost them in their premium. Are you are suggesting that the Flood Re model is a more cost-effective, or at least a surer cost model for our constituents than the NOAH model that Marsh Mac are proposing?

Otto Thoresen: I made essentially two points about the NOAH model. One was that there is an issue about control, oversight, governance and losing the benefits of competition. There are ways you could try and structure it to try to bring some of that back, of course. The second point for me is one about what we call the levy or the cross subsidy. There is actually a decision for us as a society to make about our willingness for the 98%, effectively, to pay something towards the costs of the 2%. That is critical to our model. I happen to believe that it is a mechanism that provides the best outcomes for society as a whole.

Barry Gardiner: It socialises the costs of flooding.

Otto Thoresen: I believe that as long as there is very clear and strong governance around how that levy is raised, the amount of levy and the appropriateness of that levy, then it has many attributes that are very positive. Of course I would say that because it is the model we are putting forward.

Q175 Barry Gardiner: Marsh Mac will have their day before us as well. Can I just tie up on that? Because there is a percentage under the Flood Re model that would not be covered in the fund, and that is perhaps perceived as a role for Government as a funder of last resort, it is possible, is it not, to have certain reinsurance cut in at that point, which could deal with that excess layer of insurance that would be necessary.

Otto Thoresen: As I said earlier, for me there are two components of this contingent liability and exposure. There is what I would call a short term one, which is the one about timing. It is about flows into the fund, the Flood Re pool, and flows out through claims. If one takes a view that the assumptions one has made in structuring the thing in the first place are borne out in experience then those cash flows should even out over a relatively short period of time. We have already, within the Flood Re model, talked about using reinsurance to cover off some of that potential volatility as you move up into a number of big events happening in a year. Within the Flood Re model, which covers the 2% or so of properties that are high risk, we believe an appropriate cap in terms of the use of insurance would be somewhere around £2 billion of losses. The reason we do not go further is because the further up you go the more it costs. Yes you are buying more certainty then, but at a significant cost to everybody. To be honest, the kind of events that take you through that £2 billion cap-given you are only talking about the Flood Re proportion of this, not the total cost to the UK-would be events beyond anything that we have ever seen. Would you say that?

Angus Milgate: It is tough to say.

Q176 Barry Gardiner: I am conscious that we are pressed for time. I do not want to cut you off mid-flow but I need to get on to ask my next question for you. What are the principal legislative and regulatory reforms necessary for us to be able to introduce either of these models?

Otto Thoresen: There are two types of decision to be made, which is a slightly different point but bear with me for a second. In terms of legislation, one of the disadvantages and weaknesses of the Statement of Principles is that it is not compulsory on the insurance market. There clearly is the opportunity for insurance participants to choose to operate within lower risk areas and not have to carry the responsibilities of the Statement of Principles in respect of existing properties that are higher risk. The one thing that we would argue would have to be legislated for is, if you wanted to write property insurance in the UK you would have to participate in this model. That would be the one thing that would ensure the levy covered the market as a whole. Then there are a series of decisions you have to make about how you want to structure the scheme. We have already discussed those decisions, they are around where you put your insurance levels and what price you set as the cap for high risk. For a property to qualify to go into the pool, the price of the flood insurance for that property has to be above the cap as you have set it. If you set the cap lower you get more properties in the pool and if you set the cap higher the price to the individual household is more. There is a discussion to be held about that. The final decision has to be made about how you then decide to allocate that across different types of property. Clearly there is scope here to target this support more towards people who need it more. There are a few decisions to be made.

Q177 Barry Gardiner: Got it. So there is primary legislation on the fundamental issue and secondary legislation on the rest. Which bits are holding up getting an agreement around this at the moment? Which regulation is it? Is it primary, secondary or bits of the secondary? Why are we not further forward?

Otto Thoresen: To get this in place there are many hurdles to overcome. I certainly do not want to get into a public discussion about where the negotiations are, because those negotiations are in train.

Barry Gardiner: What a shame; I had hoped to tempt you.

Otto Thoresen: We are sticking in there to try and get a good outcome. Actually, legitimately, the questions that are causing most energy to be expended are the questions that you would hope are being asked about the appropriateness of the pricing, what effects this can have on households, how we balance the need to make the Flood Re pool sustainably funded but at the same time not overload people with increases to their premium rates. Clearly, the consequences in terms of the effect not only on individual households but on things like the affordability and attractiveness of property, ability to get mortgaged on a property, etc., are very fundamental issues for people. There is a good discussion going on around those issues. The sad thing for me is that this is now getting to the point where these discussions are happening very seriously but, to be honest, it has been two and a half years since this process started.

Chair: Can we move on?

Q178 Mrs Glindon: Mr Thoresen, to what extent are insurers and reinsurers fully convinced that the Flood Re model, of a type currently under discussion with the Government, is the best model?

Otto Thoresen: I can certainly speak for the insurance industry and members of the ABI. I have complete support across the membership of the ABI for the model that we are putting forward. They do believe that it is the best way to continue to provide accessible and affordable insurance cover for flood risk to our customers on a sustainable basis. There is strong support. In terms of reinsurance partners, we have had discussions with many reinsurance partners and they have been actively involved in those discussions. They are enthusiastic participants in the debate. Clearly, where it lands is going to be important for them as to whether they see it as something they would participate in, but certainly at the moment that is the sense we are getting.

Q179 Mrs Glindon: How much extra will either the Flood Re or the NOAH model cost each household on their home insurance premiums?

Otto Thoresen: Let us talk about a couple of components to this. The first is the levy. This is the cross-subsidy. If we say that 98% of properties are outside the Flood Re pool and 2% are in it, then the levy on the lowrisk properties would be of the order of £8 per household. That is split to about £5 for buildings and £3 for contents. How you set the pricing cap for entry into the Flood Re pool dictates what eventual price the individual high risk households will have to pay for insurance compared to what they are currently paying. If you set that cap high then the potential increase for individual households at high risk will be higher; if you set it lower then the potential increase will be lower. That has not been fixed yet, so it would be wrong for me to start predicting what we might be talking about.

There is nothing formalised within the Statement of Principles that talks about pricing. Effectively, what the Statement of Principles says is that you will continue to offer insurance to your customer, but the price at which you do that is not set down anywhere. Although getting absolutely accurate information on pricing across the market is difficult, and there are competition issues around doing that, the sense we have is that there has been some increase in pricing to reflect the risk during the period of the Statement of Principles. Whilst there would be an increase, those high risk properties are, in all likelihood, paying more now anyway.

Q180 Mrs Glindon: Moving on to customers and what they think, what evidence do you have of the willingness of customers who live in low flood risk areas to take on such additional costs for those in high risk flood areas?

Otto Thoresen: The evidence is patchy. It is quite difficult to research this when we do not even have a stable model yet to research. It is quite a complex concept and it is quite difficult to get really clear feedback. However, we have talked to consumer groups about this and we have talked in some environments with consumers. We clearly have relationships with other stakeholder groups like the National Flood Forum and others who have been actively engaged in this. The sense we get is that most people realise that, these days, it is quite unpredictable who might be affected next by the kind of events that are happening all the time. Whereas there perhaps was a time when some people might have said, "Well, if people had bought properties in a high risk area then good luck to them, they should have to deal with the consequences of that," I get a sense now that people understand that it is not just a simple matter of how near you are to a river. There are actually a number of different factors because of the climate and because of the weather experience that are leading to an unpredictability to this, which means this socialisation of the model might make sense to everybody. At the levels we are talking about my instinct is that, if it is explained clearly and the governance around how that money is being used is clear, visible and transparent, broadly this would be supported. But until we have something more specific that we can engage in discussion with, I would not like to be too confident about that.

Q181 Mrs Glindon: What would the relative costs of an annual household flood risk cover in a low risk flood area compared with a high risk flood area be without Flood Re, NOAH or a similar crosssubsidy model?

Otto Thoresen: That is quite a complicated question. I am certainly not just going to start creating answers. If you would like me to supply information to you in writing with a considered view on that, that might be the best way of dealing with it.

Q182 Chair: The Pitt Review very clearly said that there should be access to the Environment Agency maps, because you are mapping, they are mapping, councils are mapping, everybody is mapping. Are you relying on the Environment Agency maps to reach your conclusions?

Otto Thoresen: I have support behind me so if I go off piste I am sure I will get some help. The sense I have had in overseeing the process over the last 12 months is that we are fully engaged with every source of information that we can get our hands on in order to come up with the modelling that we have done. We have also been getting independent support from people like Aon and others through this process, to try and make sure that what we have done is as solid and predictable as possible. Even there, of course, there is still some uncertainty, as you can understand.

Q183 Chair: Can I just be clear about what you said about this element of compulsion? Is that element of compulsion only relating to those wanting to sell household, contents or building insurance so not car insurance or anything?

Otto Thoresen: No, no, it is for the domestic property insurance market.

Q184 Chair: The new unpredictable since 2007 is surface water flooding. To what extent have you factored in surface water flooding to your cost scenarios?

Otto Thoresen: I might get some help from Angus here. I have been very lucky. Most of the insurance work I have done comes from the far more predictable world of life and pensions, where you have far more reliable data and can draw trends. This is clearly an environment where that predictability is a lot more difficult. We have certainly built into the assessment as much as we can in terms of anticipating how the environment could develop.

Angus Milgate: The insurance product itself is a full perils policy. It does not distinguish between surface water runoff, coastal sea surge, or river flooding; it just covers flood. The neatness of Flood Re is that the risk enters the pool for being above a certain threshold in premium. If the loss were to arise from surface water flooding and the risk was in the open market, it would stay in the open market and be priced accordingly. If the flood were to occur from whatever form it would either fall to an open market or Flood Re. If we see more instances of surface water flooding in a particular area, the insurance companies in a competitive environment would change their pricing. When the price gets to the level at which it breaches a given threshold, that risk would fall into Flood Re and then a different pricing mechanism would take care of it. The different causes––the heads of damages and where they come from––are taken into account, but in terms of the response and the protection, it is absent.

Q185 Chair: You mentioned the £8 levy, which is replacing the cross-subsidy. Is this £5 extra on buildings and £3 extra on contents? The flood visits I have made to those houses, either in my own area or across the country, involve people who really are living from hand to mouth and feel that they cannot afford the cost of contents insurance as it is. If you are proposing to put an extra £3 on contents, I would imagine that there would be fewer people going for contents insurance, which is not what we are trying to achieve.

Otto Thoresen: The £8 estimate of what per household cost would be is an attempt to take what we estimate to be the current cross subsidy that is operating within the Statement of Principles market and turn it into what the levy would have to be to be equivalent to that cross subsidy.

Q186 Chair: So it is an uplift?

Otto Thoresen: No, it may be a redistribution. The thing about the Statement of Principles model is that it is not formalised; it is informal. The extent to which individual insurers are choosing to cross subsidise is because they are, effectively, in a position where they have a lot of high risk properties on their books. We assess that to be an aggregate across the industry, equivalent to an £8 per household cost. Now, in some households the reality is that that cross subsidy may not be where they are operating currently and some may be operating at a higher level. It is not an exact science; it is an estimate. The point is that the overall cost to households-not that that would help the individual household we have just described if they happened to be one where it did increase their premium-would be kept, in aggregate, the same; that is the plan. Now, there is also the question about the extent to which you migrate your model to what would be more like a free market over time and move closer to riskbased pricing. There are arguments about what kind of behaviours you want to incentivise within the market in terms of the sustainability of that market. That, for me, is a discussion that you have later; it is not a discussion you have now. The issue for now is to give people confidence in the continued provision of insurance and give them access to that on an affordable basis.

Q187 George Eustice: I get the idea of having a pool, because you have those 2% of households that are at extreme risk and having some kind of levy on other households to do that. What I do not understand from anything you have said so far is why you need the Government to stand behind all that as an insurer of last resort in these socalled extreme circumstances. You are, after all, the insurance industry; your job is to cover risk and develop models to do that. It feels to me, put cynically, that you as an industry may be trying to dump risk on the taxpayer.

Otto Thoresen: I absolutely understand the question and I understand why it needs to be asked. Let me just comment in two or three ways. The first point is that we are talking here about the contingent liability that would incur if there was a catastrophic event. So we are talking about a very significant, one in 300 year type event.

Chair: That would have been covered under the current Statement of Principles.

Angus Milgate: I will jump in on this. In the commercial arena, every UK insurance company buys an element of reinsurance. Broadly, as an average, that takes them to about a one in 200 year purchase. All we are saying is that, with Flood Re, we are looking to replicate that same level of cover.

George Eustice: Can I just interrupt because this is my point-

Chair: Hang on. Just finish that, because that is quite important. So you are going from one in 200 to one in 300?

Angus Milgate: No, I think that Otto’s point was that if Flood Re was to buy a commensurate level of cover with the commercial market, were there to be an event that exceeds Flood Re’s protection, it is likely that the commercial market would be in the same position and we would be in a very severe situation nationally and economically.

Q188 George Eustice: Is there a bit of a contradiction here? The real problem, and the reason we are having to look at this, is that we have these problem properties where the risk is much more frequent than one in 100 years. Suddenly you are now saying that in a one in 300 case we need Government as a backstop.

Otto Thoresen: The way I would look at it-and I would say I am keen for Angus to agree with me or disagree-firstly, let us understand what a one in 300 year event would look like. You are talking about a conflation of events involving significant areas, builtup areas and potentially the North Sea incursion. It would be a significant event bringing the UK into a very difficult situation. It is a one in 300 year eventuality. The question is where you draw the line in terms of how far you try and push your reinsurance coverage to be able cover you up to that sort of event. My view of this is that there is a tradeoff point. The further you go up that line the more expensive it becomes to provide the cover. That feeds through into the premiums you have to charge everybody to cover that risk. In my view it is a judgement call about where the appropriate balance is because it is a one in 300 year eventuality and you want to be able to continue to provide insurance cover for households in this country at an affordable price on a sustainable basis.

Q189 Chair: Could you just stop there? What you are saying is that at the moment there is a voluntary agreement, which you the insurance industry cover under the Statement of Principles, for a one in 200 or a one in 300 year event. For a one in 300 year catastrophic event you would cover that voluntarily under the Statement of Principles.

Otto Thoresen: This is Angus’s territory rather than mine. I did not make any claims about where individual insurers-

Chair: The Committee is just trying to understand the current arrangement so we can begin to understand what is changing.

Otto Thoresen: Let me try to answer that question or at least try and help answer that question. We have a current environment where individual insurers make decisions about whether they take risk on or not in all sorts of circumstances. In this particular circumstance, under the Statement of Principles, they are, by sticking to the Statement of Principles, agreeing to continue to offer insurance cover to properties that otherwise-because of their business model or business strategy or whatever-they might not choose to continue to provide cover for. They, to a certain extent, are beginning to reflect more and more the actual risk-based pricing for these properties.

Q190 Chair: Let us not play with words here. What I want to understand is this: at the moment, under the Statement of Principles, if I had a one in 300 year event in my house, would I be covered under the flood insurance that I have purchased because it is standard?

Otto Thoresen: I would answer it in a slightly different way.

Chair: No, what we are trying to elicit from you is what the current situation is, how it is changing, who bears the risk now and who you hope will bear the risk in the future.

Angus Milgate: There is a slight confusion there between one in 200 across the whole portfolio of risks and that event being defined as one in 200 that affects my house. In the commercial arena, as a broad statement, some buy less and some buy more but they will generally say they buy to one in 200. Were that cover to be exhausted from a bigger event, the insurance company might go out of business.

Chair: You have been saved by the bell. I apologise. If you could bear with us, we shall go and do our public duty, for which we have been elected. We will adjourn for a short period of time and try to get back within 15 minutes.

Sitting suspended for a Division in the House.

On resuming-

Chair: Thank you very much indeed for your forbearance. What we are going to suggest, if you are agreeable, is to ask you to write in on those points, if I may, just so that we can quite understand. That would be helpful.

Q191 Neil Parish: My question is about those properties-and I have several in my constituency-where individuals have taken quite a lot of effort to stop the water coming into their properties. Some might have waterproof barriers around their property or whatever. To what extent are insurers reflecting measures installed by individual householders to minimise flood risk or the impact of flood damage to their homes in the premiums charged?

Otto Thoresen: The simplest way to try to answer that is that, where the insurer can be provided with evidence that supports the effectiveness of the measures that have been taken, they want to do the best job they can in assessing the risk that a property brings to them as insurers and they will fully take that into account. The mechanism in order to achieve that normally will be one that involves some sort of assessment by a professional of the property, the measures that have been taken and the effectiveness of those measures against the kind of risk that that property is exposed to. So in that sense yes, but it does not lend itself easily to some of the methods of buying insurance that are more mass market or comparison website style approaches, where that level of detail cannot really be furnished in a way that is effective for the insurance underwriter to make his decision.

Q192 Neil Parish: To what extent can people help themselves in this instance? If they spend quite a lot of money trying to protect their homes, how can they be sure that you, the insurance companies, reflect that in the premiums? Do you just take the fact that they are drawn on a map and the Environment Agency says they are in a high flood risk area and you will charge them x, irrespective of whether they take any steps to try and protect themselves?

Otto Thoresen: No is the answer. Again, I would go back to the answer I gave before, which is that the insurer, when he is assessing the risk, can only assess the risk on the basis of the information he has available to him. At that point, if he has nothing more than a geographical location as his source, then that will be the basis of his risk assessment. Where there are measures that are in place to improve the risk management of that property then that will be reflected in the price, if it can be understood and made known to the insurer. The premium will be lower as a result. Is that right?

Angus Milgate: Yes, I do not have much to add. Flood is only one peril and there can be lots of other reasons why an insurer would choose to insure a client. Once you are through that first post location data assessment, other policies may have a broader relationship and then you can get down into the underwriting.

Q193 Neil Parish: On accredited products, kitemarks and the like, do different insurance companies recognise different products or do you have a fairly uniform approach as to what people can use?

Otto Thoresen: In common with the insurance industry generally, the standard of the product, the quality of the product and the kitemarking approach is a good way of ensuring that a product of the right standard is going to be used. Of course it also has to be a product that is designed to deal with the risk that a particular property is running. If you have installed something that can protect you from water coming out of a river and down through your front garden that is no good if actually the water is going to come up through the floor and cause damage that way. It is again a question of the relevance to the risk you are running that is the most important factor. The quality of the work is clearly important too.

Q194 Neil Parish: Do insurance companies take a fairly uniform approach to this or do they take an individual approach?

Otto Thoresen: I am not close enough to the detail to answer that. I would be surprised if they took a totally individual approach but I would be very happy to cover that point in writing afterwards.

Chair: We are going to temporarily adjourn for the vote and we are going to ask our Special Adviser to have a word with our witnesses as to how we proceed, if we may. We stand temporarily adjourned.

Sitting suspended for a Division in the House.

On resuming-

Chair: I am going to suggest that, with the agreement of the witnesses, for which we are immensely grateful, we thank you for the evidence we have heard this afternoon. I understand that you are agreeable to reconvene and we are most grateful if that is the case. Thank you very much indeed. Thank you for having participated and we look forward to hearing from you again.