Flood Funding

 Supplementary written evidence submitted by the Association of British Insurers

Response to Marsh Submission of 20th March

Part 1: ABI views on the Marsh ‘Flood Mu’ proposal

1. Flood Mu would not safeguard affordability. This is because, unlike Flood Re, it would not place a maximum cap on flood premiums. As Marsh explained in the EFRA hearing on 20th March, the only way to guarantee affordability would be for the Government to step in and pay premiums or claims. This is unrealistic and unnecessary.

2. Flood Mu would not safeguard availability. Because insurers would still hold 50% of the risk of the properties they insured, it would make little economic sense for them to cover high risk homes. With Flood Re, there is no incentive to decline cover.

3. There is no financial incentive within the Flood Mu model for the Government to invest in flood risk management, because all of the risk resides with the insurance industry.

For these reasons, the Flood Mu proposal is significantly inferior to Flood Re and would not solve the policy challenges that we are jointly trying to tackle. It is therefore completely unacceptable to UK insurers.

Part 2: Response to Marsh critique of Flood Re model

The Marsh submission raises a number of concerns about the Flood Re model, four of which are misplaced.

1. Marsh suggested that Flood Re would create perverse incentives on high risk homes not to manage their flood risk and developers to build in flood risk areas.

· High risk homes would still have an incentive to reduce their flood risk, despite their premiums being capped, because if risk was reduced enough they could come out of the pool and get a cheaper deal. Flood Re may also include conditions for managing flood risk for the properties that flood most regularly.

· Flood Re would not encourage development in flood risk areas because it would not be available to new build homes. The Government’s revised National Planning Policy Framework also contains significant safeguards against a return to flood plain development.

2. Marsh suggested that the Flood Re levy would raise prices, as ‘tariffs tend not to be contested’.

· The risk could equally be the other way round – the levy could be competed away by the larger insurers that can absorb the costs relatively easily, meaning it does nt get passed on to policyholders at all. In reality, we have to assume the middle ground, where the levy effectively cancels out the current cross-subsidy in the market. This has been central to the design of Flood Re.

3. Marsh suggested that Flood Re involves the insurance industry doing ‘social policy’ (i.e. defining ‘affordability’), which should be the Government’s job.

· Flood Re is about the industry working with the Government to deliver an important set of social policy objectives, in line with insurers’ commitment to maximising our value to society.

· Under Flood Re, Government could be involved in the governance and decision making of Flood Re. The extent of this is a matter for discussion.

4. Marsh suggested that the Government backstop is not the right way for Government to be involved, because it is a poor incentive to motivate Government to invest in managing flood risk.

· Flood Re’s approach to Government ownership has been for it to provide a backstop in the event of a natural catastrophe and to provide commitments including no further reductions to flood defence expenditure. Neither has been a major sticking point in discussions to date. The Marsh idea, as set out in its EFRA submission, is for Government to subsidise homes directly by paying a share of claim costs. This suggestion is risible.

March 2013

Prepared 5th April 2013