As householders face the costs of flood-hit homes, a row between the government and the insurance industry raises questions over how much protection they have
In a week when hundreds of households have had their homes swamped by water, a war of words has broken out between the government and the insurance industry over paying for affected properties.
Householders in flood-risk areas should by now have the peace of mind of knowing their properties are still insurable under an agreement between the government and the insurance industry.
However, although that agreement was supposed to have been finalised in the spring, the two parties have failed to reach a consensus and talks seem to have stalled over whether or not householders will have to pay for part of the cost of repairing flood-hit homes through higher premiums.
The Association of British Insurers (ABI) proposed a solution that would see all homes continue to be covered, with a cap on the annual premium they would pay. Any property with a risk priced above this cap would get its insurance from a central pool of money paid for by a small levy on every home insurance policy in the country.
It seemed as though the government was close to signing off this plan, but a spokeswoman for Defra said the government will not approve anything that results in rising premiums.
“The government is adamant there will not be an increase in household premiums,” she said, adding that the £10 figure suggested as the levy on every household was “made-up”.
“The situation is that there is enough money in the system for insurers to offer cover to high-risk homes, but at the moment it is not a level playing field as some insurers are cherry-picking and opting not to cover high-risk properties,” she said.
Most companies already raise a small sum from policyholders to cover the cost of insuring high-risk homes. However, some insurers are at an advantage in being able to solely offer products to low-risk customers, whereas others have to offer cover to many high-risk properties. This is because industry rules require insurers who already have flood-hit properties on their books to continue to offer cover to these households, albeit at a high price.
In a statement Defra said: “We are now considering a cross-subsidy mechanism that would ensure high-risk households can get affordable insurance without extra costs being placed on policyholders or taxpayers.”
The ABI said it was surprised by the government’s remarks, which a spokesman described as “misleading”. He added: “The government is engaging with us but nothing has been agreed. However the pooling model is very much still on the table.”
The insurance issue has recently come to a head because the “statement of principles” that governs existing insurance arrangements expires in June 2013. The statement means insurers agree to provide cover for flood-risk properties provided the government continues to invest in flood defences.
However, the government made it clear some time ago that it will no longer sign off this deal once it runs out. A failure to reach a solution would potentially leave 200,000 homes without affordable cover, meaning owners would be unable to sell their properties, potentially exposing them to financial hardship.
The National Flood Forum (NFF), the charity that helps flood-hit households, said it was concerned that the length of time the discussions was taking were adding to the anxiety of people in affected properties.
“The concern is that people will be put in a position where, among other things, they won’t be able to sell their house, or where their mortgage is invalidated because they can’t get buildings insurance,” said Paul Cobbing, chief executive of the NFF. “Government must reach agreement with the industry quickly so that flood-hit individuals and communities will be able to obtain affordable insurance in years to come.”
The floods in the past 48 hours have put further pressure on the insurance industry to act. The AA says it received more than 40 claims for homes damaged by storm or flood in just two days. In addition, there was a 12% jump in motor claims on Tuesday, many associated with collisions in downpours and poor visibility, as well as some cars swamped by flood waters. Lloyds TSB insurance said there had been a 52% increase in storm claims alongside a 50-fold increase in flood claims across the UK this year in the wettest June on record.
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