How the industry wrestled with life post-2013 at last week’s flooding conference

It was, noted Barry Smith as he surveyed the packed room, the biggest turnout he had ever seen for an ABI event. The occasion that the Ageas UK chief executive was referring to was last week’s flood conference, held at the association’s London headquarters.

It’s not entirely surprising that the topic aroused so much interest. The statement of principles agreement, under which the insurance industry has agreed to continue to offer flood cover as part of standard products in return for a long-term government strategy to tackle the issue, is due to expire in 2013. The turnout spoke volumes for the degree of concern in the industry about the feasibility of developing a replacement agreement.

The recently appointed floods spokesman for the Labour opposition, Jamie Reed, told delegates that no single group could tackle the flooding issue on its own. He argued that there needed to be cross-party consensus on the issue.

“We don’t want to see major changes to flood defence policy from parliament to parliament," Reed said. "Ministers may come and go, but people live with flood risk. Government must provide certainty.”

New consultation paper

Secretary of state for the environment Caroline Spelman used her speech at the conference to launch a new consultation paper on funding flood defences.

Under the government’s plans, funding for flood defences will become a lot less centralised than it is at the moment, where Whitehall provides the vast bulk of funding for flood defence projects. Instead, the government will look for much greater match funding by private companies, such as developers, and local bodies, including residents groups and councils.

In another change of tack, the existing system for deciding which projects should go ahead will also be overhauled, with less prioritisation of projects from Whitehall.

The government’s hope is that this partnership approach will lead to a greater number of projects coming forward.

Spelman didn’t stick around to take questions on her proposals, explaining that she had to get back to Westminster before planned student protests would make parliament impossible to access.

New complexities

But director of the Local Government Information Unit thinktank, Andy Johnston, highlighted the risks of giving more control to the grassroots by pointing to separate changes to the way councils are funded.

Councils used to receive a pot of money from central government that was earmarked, or ringfenced, for spending on flood defences. But under changes introduced by the coalition government, this ringfencing has been scrapped, giving councils the freedom to spend their government grant how they see fit.

“As part of the change to how local government is funded, ringfencing has disappeared. If you want to lobby for flood defences, you have to try and talk to local authorities and make the case on the ground,” Johnston explained.

A later session underlined just how thorny the funding issue is.

The ABI has commissioned consultancy firm Oxera to look at developing a better risk-sharing model for flood defences.

But Oxera’s initial findings suggest that there will be no easy answer. Senior Oxera adviser Fod Barnes said: “Nobody seems to have got this right anywhere in the world.”

Swiss Re director Dr Jens Melhorn, commenting on the UK’s existing system of flood insurance, went further. “It’s the best system in the world: flood insurance is available to everybody in the UK.”

A sensible solution

Developing a system where premiums are more tailored to risk would lead to a situation where, in some places, it would not make sense to offer flood cover. As an example, he said that aligning premiums much more closely to risk could result in annual payments of up to £6,000 in the areas most likely to be flooded.

One delegate commented: “If you have to charge £6,000, it’s a strong suggestion that the house is in the wrong location in the first place and we are reducing the incentive to reduce the problem."

But Barnes suggested there were downsides with the current system, which effectively cross-subsidises the most at-risk properties. “As a result of affordability problems, you have taken away financial incentives from individuals and communities to reduce the risks going forward,” he said.

For Ageas’s Smith, who takes a close interest in the flooding issue in his capacity as chair of the ABI’s property committee, the issue is fundamental for the future of the insurance industry.

“The real question is how profitable the sector is. That’s what worries me. If we don’t find a sustainable future, the market will not be there. If we don’t come up with a sensible solution, there will be whole parts of the country that are impossible to insure.”