Mexican standoff as flood insurance reaches the end game

Amid rumours that the Government is getting increasingly exasperated with the performance of the ABI on replacing the Statement of Principles (SoP) underpinning UK flood cover, the odds on a new deal being in place by the time the agreement runs out in June 2013 have lengthened rapidly.

Even if a deal is done within the next fortnight, the new agreement would need primary legislation. The Government’s Water Bill is due before Parliament in July, and it would be possible to insert clauses into the Bill, but it won’t receive Royal Assent until 2014, so the current SoP will have to stay in place until at least March next year. The insurance industry has adopted an ‘over my dead body’ approach to extending the SoP, arguing that it unduly favours new entrants who don’t have to pick up flood risks (unless they want to), but as we approach the Summer, a deal feels as far away as ever.

Government and Industry are in a Mexican standoff, and the victims are the UK’s 2.2 million households at some sort of risk from flooding, with some 200,000 of these homes at high risk.

Spending on flood defences will total £2.1bn between 2013-2017, compared to £2.36bn spent over the last four years. 145,000 homes will be better protected from flooding by 2015. This includes an extra £120m annual spend announced in the Autumn Statement, and the Government has belatedly realised that spending on big infrastructure projects can spur economic growth. So, Capex is a good thing, but why has it been so hard to come for Government and industry to agree on the insurance piece?

There are a number of proposed solutions on the table: The ABI’s favoured option is Flood Re, which would be funded by premiums paid on policies that cover high risk homes, with the extra cost that goes on to normal policies cross-subsidising the riskier policies – which works out at £8 per policy (ABI). But there are issues with the contingent liability and how much the Government would have to put into the model if there were serious floods in the short term. If Flood Re was in place in June 2012, it would already have run out of money. The Pool will need two years of benign weather to build up sufficient reserves.

Others include Flood Mu (Marsh), Project Noah (Marsh & Guy Carpenter), a quota share arrangement proposed by Aon Benfield, and/or a combination of all these. Some politicians have proposed hypothecating part of the IPT to pay into a pool, others think it’s best left to the open market. There are, after all a number of specialist insurers writing these kinds of risks. 

One wonders how much the insurers have stepped away from the negotiations and left the ABI to it. I understand that Government ministers have not met with many or any insurance chief execs, and the myriad ‘solutions’ put forward suggests a lack of joined up lobbying by the industry. ABI boss Otto Thoresen has the savings industry in his DNA, while the ABI chairman, Tidjane Thiam, is a born leader, but Pru has no interest in the UK GI market.

So maybe we need to deliver a result by changing tack, turning to a GI chief executive with the force of personality and natural leadership skills to hammer out an agreement. Coalition and consensus are fine in principle, but sometimes it makes sense to have a leader with conviction and clear purpose to make change happen [ask Lady Thatcher].

After all, the stakes are high, and not just for flooded homeowners and businesses. Social utility in financial services is a hot topic, but those of us who work in this industry know that insurance is more than socially useful, it is essential; without it the global economy would grind to a halt. Yet politicians are prone to lump the industry in with the rest of the financial services sector, and we cannot take it for granted that comparisons with investment banking, for example, are wholly unfair.

In bringing the SoP negotiations to a successful conclusion, we need to view the issues through a different lens. Hundreds and thousands of people are relying on our industry to deliver a new arrangement that is affordable, comprehensive and not a big burden on the taxpayer, as well as being fair to insurers. They will not look kindly on us if we will not, or cannot, meet our promises.