UK floods: The twisted roots of the great flood insurance muddle

It’s September 2012 and you’re the new Environment Secretary. What should be your priority? Insurance negotiations or badger reduction? Bear in mind that this uninspiring choice is unlikely to be the one you dreamt of when first entering Parliament: you are an ambitious, clever Conservative with a safe seat. Maybe you envisaged strutting the world stage, brokering peace and expanding Britain’s influence, or you might have wanted to get a grip on the nation’s finances, perhaps reforming welfare to create a more entrepreneurial society. Even at the lower-ranked International Development department you could help to save lives in deprived lands, while those irritating Lib Dems have poached the much-derided Scotland department, where you could at least help to save the Union.

No such luck for Owen Paterson. The top items in his in-tray were whether to delay pilot schemes that would see badgers shot on sight in an effort to stop the spread of bovine tuberculosis, or to try and finish the protracted negotiations with industry on flood insurance. The optimal option in a sub-optimal choice was clearly badger culling – the higher-profile, sexier and more urgent issue of the time.

There was some disquiet at the time that Mr Paterson focused his attentions too heavily on badgers, perhaps distracted by the loud anti-culling protests of Brian May. A little over a year later and Queen’s guitarist could still be found holding forth in Parliament on our tunnel-digging disease-carriers, albeit in the researchers’ drinking den that is the Sports & Social Club.

Fortunately, David Cameron decided that enough was enough and he was going to move those boring insurance discussions closer to Number 10. And so it was that Oliver Letwin, arguably the Prime Minister’s least-heralded but most important lieutenant, took over negotiations for an obscure but vital deal that is crucial to hundreds of thousands of homeowners.

Insurers had become increasingly angered by the Statement of Principles, a deal introduced in 2000 that essentially saw the industry subsidise cover for those living on floodplains. The deal made cover, it was argued, affordable for these policyholders, whose premiums would be about £340 a year when a typical flood-related payout was more than £20,000.

In return, the Government was supposed to invest heavily in flood defences, reducing future claims. The Association of British Insurers (ABI) argued that the state had not subsequently invested nearly enough, with the impacts of climate change and developments that saw cement covering permeable soil outpacing expenditure on flood barriers.

The Statement of Principles was a temporary deal and it was due to run out in 2013. Yet Government and the ABI had been stalled in talks for what seemed an eternity, unable to come to an agreement on what could replace the scheme. There was a risk that owners of the 200,000 homes most at risk from flooding could face unaffordable premiums of around £30,000 – or even be refused cover entirely.

Mr Letwin took charge, the Statement of Principles was extended, and eventually the parties agreed to Flood Re, to be introduced this coming April. A £10.50 levy will be placed on household premiums across the country, subsidising those living in areas at the highest risk of flooding.

As the devastating floods of the past few weeks in Yorkshire and Lancashire have shown, an improved deal does not come a moment too soon. Even with reduced premiums, there are plenty of signs that struggling families in these counties have been unable to afford the existing insurance, with lights on in homes that surely would have been evacuated had the residents had the cover to be temporarily relocated to a hotel.

But, as the cost of the floods threatens to top £5bn, what now needs to be thought about are the tens of thousands of commercial properties that will also be ruined by the successors to storms Desmond, Eva and Frank.

Flood Re, unlike the Statement of Principles, does not cover commercial buildings, so that landlords, shops, and small businesses will not receive the same insurance subsidies as their residential neighbours.

Mr Letwin had planned Flood Re 2, focusing specifically on these premises. He even told one landlord, Simon Tattershall in north Devon, that it was his “dream” to introduce this sequel scheme.

However, Mr Letwin’s advisers concluded that the scheme would only see a marginal drop in premiums, meaning the high cost of setting up and establishing Flood Re 2 could not be justified on financial grounds. They reckoned there is already substantial commercial insurance available that covers the effects of flood damage, a competitive market meaning that premiums are relatively low in even risky regions.

Mr Letwin dropped the idea just months before thousands of shopkeepers, entrepreneurs and small businesses saw their own dreams ruined by that most British of things, the weather. Mr Tattersall argues that Mr Letwin has been “blatantly misled”, while the Federation of Small Businesses recently found that 50,000 of those they represent had been refused relevant cover.

The ABI is looking at developing an alternative industry-led scheme, but Mr Letwin needs to get down to this most boring business of Government again and revisit how a subsidised Flood Re 2 could work.