Bill Gloyn: Facing the future without a paddle

On flood insurance, the future is far from clear – both for the availability of cover and for the protection of residential and commercial property.

The Statement of Principles (SoP) – the protocol by which insurers continue to provide cover in high risk areas – is due to expire in June 2013. The 2010 Comprehensive Spending Review reduced the year-on-year amount allocated for flood protection over that promised by the previous government by 17%. That reduction is in the face of general acceptance that the risk of flooding is increasing – as a result of climate change and also because surface water exposure is far higher than previously recognised (as was demonstrated by the summer floods in 2007 when rainfall dramatically exceeded drainage capacity).

The Environment Agency assesses that 2.4 million properties are at risk from river and coastal flooding, and 2.8 million from surface water. EA chief executive Dr Paul Leinster, speaking at a seminar arranged by the City Property Association last December, admitted that research on surface water flooding was lagging 10 to 15 years behind.

In response to the reduction in funding, Defra launched a consultation last November, which is due to close on 16 February. The consultation makes it clear that the 95% of flood defence investment that traditionally comes from central government cannot be sustained in future.

In addition to suggestions on how the shortfall can be made up – primarily by the private sector, although already hard-pressed local authorities are also expected to contribute – it sets out a formula on how funding will be determined. This will be based on value for money and outcomes. It will also pass responsibility to a more local level, reflecting the government’s localism agenda.

Unfortunately, flooding does not respect boundaries – geographical, political or national. It is not clear how disputes between local communities, of whatever size, will be resolved in determining how money is raised or spent. There is also an assumption that those at risk will be both willing and able to pay – based on what criteria is not stated.

A report from the House of Commons’ environment, food and rural affairs committee states that “it is by no means certain that any shortfall in public funding can yet be made up by private contributions”.

It is in that context that the insurance market will be considering what it does after the SoP expires. The consequences could be catastrophic – not only for those who suffer a loss but far more widely for those individuals and businesses who have an obligation to insure under mortgages, leases and other contracts. If those obligations cannot be met, there will be a breach of contract that could cause a collapse of the property market and commerce in general.

That surely cannot be allowed to happen, by the government or the insurers. One can only trust in the comment made to the committee by environment secretary Caroline Spelman, who “saw no reason why anyone should not be able to insure their property”. Perhaps that points towards the government extending the terms of the PoolRe to include flood? IT

Bill Gloyn is a partner at European Real Estate, JLT Specialty, and immediate past-president of the City Property Association.