Flood Funding

Written evidence submitted by the British Insurance Brokers' Association

 

About BIBA

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. General insurance brokers contribute 1% of GDP to the UK economy and BIBA brokers employ more than 100,000 staff.

4. BIBA helps more than 400,000 people a year to access insurance protection through its Find a Broker service, both online and via the telephone.

5. 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.

6. BIBA is the voice of the industry advising members, the regulators, consumer bodies and other stakeholders on key insurance issues. BIBA and our members are committed to helping customers access insurance for their properties. 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 met with Anne McIntosh MP, Chairman of the Environment, Food and Rural Affairs Select Committee.

Availability of flood insurance

7. 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.

8. 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.

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

10. 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.

11. 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.

12. We already have a formal agreement with HM Treasury that launched in April 2012 that has seen a 268% increase in enquiries to BIBA from older people who were experiencing difficulty seeking motor and travel insurance. A similar agreement could be created for flood risk properties. BIBA has already helped over 500 households this year find flood cover for their properties via our find a broker service and believe we could be helping a lot more. There would be no cost to Government, the industry or the taxpayer for creating this and it would offer direct help to those seeking flood cover.

13. If such a signposting agreement is created, it is only the very highest risk cases where the property owner refuses to co-operate (e.g. signing up the environment agency flood alert system) there will be difficulty in accessing cover. It is these households – a tiny minority of the overall number of policyholders – where a decision needs to be taken on whether an intervention is required – and, if so, what that intervention should be.

Reinsurance options

14. BIBA are not suggesting any specific option over another. All involve our Insurance broker members:

· Open market – specialist flood brokers

· Flood Re – Aon Benfield

· Noah – Marsh

15. However, we have put some discussion points about each in this response. Any of these three systems could be developed to put in place a suitable solution going forwards, and in fact, a combination of a number of these solutions should be discussed.

16. There are two reinsurance solutions from members:

1. UK RESIDENTIAL FLOOD INSURANCE THROUGH THE NOAH SOLUTION (Marsh / Guy Carpenter/ Munich Re)

17. The Marsh solution – project Noah – is a very different solution that covers the insurers’ whole property portfolio, not just the high risk properties (Flood Re), Noah would transfer the residential flood risk to the reinsurance market and provides cover that was not previously under a catastrophe treaty.

In Noah’s official literature, Marsh has stated the following:

· It is an independent, commercial solution to the challenge of UK residential flood insurance

· Noah is structured as a 90% Quota Share Reinsurance Facility for UK insurers

· At the heart of Noah is a flood risk pricing model that identifies and calculates the insurance cost of every residential property in the UK

· The Noah flood model provides the accuracy and transparency to enable the international reinsurance markets to take the risk away at economical terms

18. What does the Marsh literature say the advantage of Noah is to UK householders?

· UK homeowners will be able to access flood cover from any insurer that is protected by the Noah reinsurance cover

· UK policyholders will have full transparency over how their flood price is calculated and will be able to reduce their cost of insurance through flood resistance and resilience measures if they so choose

19. What does the Marsh literature say the advantage of Noah is to UK insurers?

· The Noah model provides insurers with detailed prices for all 27m UK properties

· Insurers can safely underwrite homes in previously "no-go" areas      

· With flood risk removed, solvency capital requirement reduces by up to 10%

20. What does the Marsh literature say the advantage of Noah is to the Government?

· Noah requires no taxation, no subsidy, no levies, no legislation, and no additional infrastructure

· Under Noah, there will be no contingent liability on government to pay flood losses

· The Noah reinsurance facility is available now

2. ABI FLOOD RE

21. BIBA appreciate the ABI has already submitted the Flood Re proposal to the select committee and therefore further explanation of their offering is not required. Our member Aon Benfield is offering to provide the reinsurance solution for this model.

22. BIBA believe Flood Re can deliver an important solution. Our observations are:

· The Flood Re proposal aims to address the issues of flood insurance availability and affordability for those most at risk of flooding, offering cover to those in high risk areas

· It has the support of a large number of Insurers

· Flood Re allows UK insurers to remove all UK flood risk exposure from their balance sheets

23. The challenges for Flood Re:

· Legislation would be required

· The infrastructure to operationalise Flood Re will need to be created - insurers would also have to make significant changes to their front end IT systems to separate "normal" business from "Flood Re" business.

· A levy could be required. This could be potentially on insurers (or possibly policyholders) to create the income to fund the reinsurance model and the claims reserves, any levy would bring a number of challenges to the table.

· During its formative years the reinsurance limits could be tested, particularly if 2013 is an exceptionally high frequency claim year, like 2012. However remote this situation may be, it would leave some contingent liability with Government as it will take time to build up the reserves.

Other issues

24. BIBA believe that UK home owners will find it far more easy to arrange cover if they have the appropriate risk management solutions in place. This could involve resilient repair from previous flooding, signing up to the environment agency flood alert warning system, putting the necessary door shields and flood guards into place.

25. BIBA believe the way forward is to get the right balance, there are plentiful amounts of reinsurance from our members, and it is only fair for an insurer to charge a price commensurate with the risk. Resilience and resistance measures are a factor and it should be noted that the Insurer is not there to prevent losses. In this connection Government funding of flood defences is extremely important.

26. For a market solution to work beyond the statement of principles BIBA wants to see:

· Signposting to flood risk property owners to suitable specialist brokers (similar to the existing age agreement)

· More promotion of Resilient Repair and Resilient new build

· Improved flood Maps – specifically surface water maps should be made available to the insurance industry

· Realisation of full flood defence spending as for every £1 spent on defences, at least £7 is saved in claims

· Ultimately any solution will require Cooperation between Property Owners, Insurer, Brokers, DEFRA, the EA, HMT, Reinsurers and local authorities

27. We hope you find this submission helpful and would be happy to discuss in further details with members of the select committee.

February 2013