A 30% cut in flood defence expenditure is 'a step backwards' for the industry, but it's not all bad news for brokers
So how was it for you? The much anticipated, and feared, comprehensive spending review (CSR) was formally announced by chancellor of the Exchequer George Osborne yesterday.
Overall, Osborne announced a total of £81bn of spending cuts that will take place over the next four years.
From the insurance industry’s perspective, possible cuts in expenditure on flood defences had been tipped as one of the main bones of contention. And so it proved as Osborne announced that investment in flood defences would not be maintained at its current level. During the period 2011-2014, the government will spend £2bn on “flood and coastal erosion risk management”, according to the Treasury.
The CSR document said that this would result in 145,000 households being better protected by 2014/15. It added that the Department for Environment, Food and Rural Affairs would work with the Environment Agency and the government’s efficiency and reform group to “review existing procurement strategies and maximise the money available, with expected efficiency savings of 15% on capital investment by 2014-15”.
The £2bn investment over four years represents a substantial decrease on the current levels of spending – in the last three years, the government has spent £2.15bn on bolstering flood defences. In effect, expenditure on flood defences is declining from £717m per year to £500m per year, a cut of more than 30%.
Though the Association of British Insurers acknowledged that the coalition had recognised the importance of continuing to invest in flood defences, it was far from satisfied with the planned level of expenditure.
The ABI’s director of general insurance and health, Nick Starling, said: “We are disappointed that this will not be maintained at current levels, given the scale of the problem and the wider economic benefits provided by flood defences to our communities and businesses.”
Starling added that the development of a long-term plan to tackle the increasing flood risk faced by the UK over the next 25 years was a matter of urgency.
Biba was similarly unimpressed with the cut in flood defence spending.Technical and corporate affairs executive Graeme Trudgill said the £2bn over four years was a “step backwards”. He added: “We are anxious that flood cover may not continue to be available following these cuts.”
Trudgill said Biba would continue to work with its members, insurers and the government “to provide access to appropriate insurance for those affected by flooding".
IIB chief executive Barbara Bradshaw was equally unimpressed with the cut. “It’s disappointing. Every time there is a flood, that’s a new area that needs flood defences”, she said.
Managing fresh risks
Turning away from flooding to the wider public sector cuts, Zurich Municipal head of local government Andrew Jepp said the cuts meant that it was more important than ever for public sector organisations to pay close attention to risk management.
“While many local authorities – and public sector organisations more broadly – have for some time been implementing effective changes to pave the way for these cuts, activity must now be ramped up”, he said.
“It is more vital than ever that public bodies take a considered and long-term approach to risk management and carefully think through the implications of any austerity measure – whether that measure is making redundancies, renegotiating contracts, or engaging with new delivery partners.”
Jepp added that failing to do so “risks not only service delivery, but could also become costly, threatening to cancel out the very savings these cuts intend to achieve.”
The decision to cut funding for the police by 4% per year could also have ramifications for the insurance industry. Trudgill warned that the cut could have a “potential crime element”. However, it wasn’t all bad news. There were concerns prior to the CSR that Crossrail, the £15.9bn cross-London railway project brokered by Heath Lambert, may also fall victim to the axe-wielding Osborne. But the Chancellor confirmed that funding would be made available to enable the project to go ahead.
And there could be an upside for brokers from the cuts, with the need for more government outsourcing proving a potential boon. For example, the CSR document highlighted how the Foreign and Commonwealth Office would continue to streamline its back office by “cutting the cost of management and support work through increased outsourcing”.
Bradshaw said governmental outsourcing could present opportunities. She added: “If the government is making cuts to its internal expenditure, an entrepreneurial broker may see a niche and put together a programme.”