My Lords, in speaking to this amendment I will also speak to the other amendments standing in my name. I can be brief because the issues raised in the first of these amendments, and indeed in the second, have already been thoroughly explored by the noble Baroness, Lady Parminter, in her amendment.
Amendments 156C and 156D are really about information for householders. I find it hard to see why one would object to giving householders information that will help them now and in the future. The first part of Amendment 156C simply asks that Flood Re should build awareness among householders of their own flood risk. Earlier this afternoon we heard the noble Lord, Lord Crickhowell, alluding to a Defra website where information could be garnered, but the fact remains, from surveys of householders, that many of them are unaware that they are living in a flood risk area, and Flood Re has been designed to be invisible to the households concerned. As currently cast it will not give them any source of information. It is important that we incorporate in the Bill the requirement for the Flood Re administrator to give households information about their risk.
The other part of this, in the addition of proposed new paragraph (f) at the end of line 25, is to again alert householders who might be affected to the fact that Flood Re is not a permanent arrangement, and that there will be a transition. The transition is over a long period—over 25 years, as we are now familiar with—but it is important that householders over that 25-year period take action if they are at risk, to reduce their risk. Therefore it is important for households to have transparent information about the nature of the transition to risk-reflective prices that will arise at the end of Flood Re. It is hard to object to giving consumers information.
I now move to Amendment 156D, the second of my amendments. Again, I can be brief about this. It requires Flood Re to be explicit about the plan for transition, and to publish a transition plan so that the householder concerned will know what to expect—otherwise there will not be clarity for households. Difficult decisions to gradually withdraw the benefits of the scheme may continually be postponed, because it is always difficult to tell householders that they are going to lose a certain benefit that would arise through the coverage of Flood Re. In order to avoid confusion it is important that the Bill sets out a requirement to give a plan for the future, and therefore prevent Flood Re becoming a permanent and growing burden on the costs of insurance paid by other policyholders. So the transition must take place at the end of the 25-year period, and my Amendment 156D seeks to ensure that a plan for the transition is published, so that we can have more confidence that it will take place, and when it will take place.
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Amendment 156F has again largely been explored in earlier discussions of the amendment of the noble Baroness, Lady Parminter. This is a way of proposing the same thing but in a slightly different form. The discussion, as noble Lords will remember, was whether some of the forecast surplus from Flood Re should be invested in mitigation. This is a form of investment
now to save costs in the future. With the likely impacts of climate change, uncertain though they are, it is nevertheless likely that the extreme events we have witnessed—for example, in the past couple of months—will become more frequent. We cannot tell by how much and when that will happen. Nevertheless, investment today to help make households more resilient is likely to save costs tomorrow.
My amendment does not specify a pattern of investment, but recognises that there could be surpluses in the early years of Flood Re. It is asking the administrator to encourage and support households to address the resilience of their properties and consider options, including investment in mitigation strategies to make properties more resilient, and to publish a plan for how Flood Re would use its resources to address the underlying risk. This is perhaps a short-term cost to Flood Re, but a long-term saving. It is an “invest to save” amendment.
Finally, I move on to Amendment 156G, which is something that has not been discussed so far. I will explore this in a little more detail. The point of this amendment is to help preserve incentives on insurance companies and households to keep the costs of flood claims down. This is important, because unless claim costs are kept under control, the levy on the bills of other households will need to rise. Under current arrangements insurers have the incentive to get householders back in their homes as soon as possible, because providing people with temporary accommodation costs insurers money. In the future, Flood Re is set to bear all of these costs under the current proposals, leaving no liability with the insurer managing the claim. So what incentive will there be to keep claim costs down and get people home as quickly as possible? A similar lack of insurer “skin in the game” has been blamed by the Competition Commission for a £150 million to £200 million rise in motor insurance premiums. Insurers may not care if home premiums rise if it affects the whole market equally. Auditing of insurer claim costs post-event will be too little, too late, to control costs.
Reinsurance products require an element of risk-sharing between the insurer and reinsurer. This is a sensible precaution by the reinsurer to avoid them being hit with avoidable costs. Risk sharing usually takes the form of a quota-share agreement whereby the insurer agrees to retain a share of all claims, commonly 25%. There is no reason why Flood Re cannot operate in this way, given that it is standard practice in the market.
If we had such an insurance-sharing arrangement, it would have a number of benefits. It would encourage insurers to properly assess flood risk, otherwise they might be tempted to take a simplistic or risk-averse approach and cede more properties to Flood Re than ought to be there, which would mean high-risk householders paying more for their insurance than they should. An element of risk retention will require insurers to assess the risk left with them. Secondly, it would encourage high-risk customers to shop around and get the best deal. In shopping around, they could well find an insurer with a lower risk assessment for their property who was willing to offer a policy below
the Flood Re cap. Thirdly, risk-sharing would make Flood Re more likely to receive state aid approval, as appropriate risk-sharing is likely to be one of the factors that the European Commission would consider in any investigation.
The amendment would also introduce an element of risk-reflective pricing for households in the Flood Re pool. I acknowledge that this has the downside that those at the highest flood risk may pay somewhat more for their insurance than those who are just within Flood Re’s scope. People will be asked to pay a small risk-reflective element premium in addition to the standard Flood Re cap, but that would reflect the important role in managing claims that householders themselves can play. Householders can take a number of actions to reduce their risk of flooding and the size of any potential claim; we heard about some of those in earlier discussions. For example, we need to encourage people to sign up to flood warnings, to heed them when they are issued and to move valuable possessions and property away from floodwater if they can.
It seems appropriate that high-risk households, along with insurers, should retain a share of the risk in line with their scope to influence the size of potential claims. There could be a concern—a very real one—that this would make insurance policies less affordable, but the thresholds could be adjusted so that the net effect was zero without increasing the size of the levy. People concerned by the risk-reflective element of their bill could shop around to find the insurer with the lowest risk assessment for their property.
The amendment would cement into the heart of Flood Re the important principle of appropriate risk-sharing. The exact proportion of each claim borne by the insurer could be subject to further debate and set in regulations, but at least the amendment would ensure that the debate was had when the time came. I beg to move.