Flooding: why we need inclusive insurance cover
Published: 18 February 2014 | Author: Bernard Clarke
As communities embark on the long process of mopping-up following the recent extended bout of flooding across the UK, we welcome moves by lenders to ease some of the financial stress caused to home-owners whose properties are affected.
Like householders themselves, lenders individually are affected in different ways by the current problems. It is therefore up to each firm to decide how best to support its customers. Some are responding by offering mortgage repayment holidays, temporary overdraft extensions, and fast-tracked loans or credit to cover emergency costs.
In conjunction with their partners in the insurance industry, some firms are also helping to arrange the rapid deployment of loss adjusters in the worst-hit areas. Others have set up special help lines for customers affected by flooding.
Lenders always seek to respond sympathetically in cases of mortgage payment difficulty – whatever their cause. They will endeavour to work out solutions tailored to the individual circumstances of borrowers. It is important, however, for any borrower suffering payment problems as a result of flooding to make sure they keep their lender informed about how they are being affected.
The immediate priority is, of course, to deal with those households affected and to tackle the aftermath of the flooding. There are, however, longer-term issues for the mortgage sector – beyond the need to strengthen flood defences.
For any lender considering a mortgage application, it is a fundamental requirement that the borrower is able to take out insurance covering all potential risks to the property, including those presented by flooding. In seeking to ensure that affordable flood insurance is available as widely as possible, we are currently pursuing two approaches:
- To continue to press for a reduction in number of properties potentially excluded from the Flood Re insurance solution. In particular, we believe that leasehold and private rented properties should be covered by the scheme. These homes are excluded from Flood Re if they are insured under commercial policies, rather than domestic ones. But these are residential properties like any others, on which council tax is paid, and we believe they should be included.
- Examining the potential of a possible compromise proposal under which insurance currently provided under the “statement of principles” remains available for households that might be excluded from Flood Re (specifically leasehold and privately rented homes). A review of the impact of exclusions from Flood Re could then be undertaken at a later date.
The Flood Re initiative
The Flood Re scheme works by creating a fund intended to cover householders whose premiums may otherwise be unaffordable because their homes are at a higher risk of flooding. The fund is built up by an annual levy of £10.50 on all buildings insurance customers.
The government’s aim is that Flood Re would create a solution that could last for up to 25 years, during which it would continue to work with the insurance industry and other interested parties – including, we hope, the mortgage industry – on plans that would make affordable flooding insurance permanently available to all householders.
At this stage, however, we would ask the government and insurers to look again at the scope of the Flood Re proposals. During the recent second reading of the Water Bill in the House of Lords, some peers were worried about the number of households excluded from scheme. We share those concerns.
Who would be excluded?
Along with the Association of Residential Managing Agents, the Residential Landlords Association and the Leasehold Knowledge Partnership, we gave our support to a press release issued in January by the British Property Federation (BPF). The release called for urgent amendments to the Water Bill, currently going through parliament, to reduce the large number of properties excluded from Flood Re. We are concerned that the proposals will leave a significant – and much larger than expected – number of owner-occupied homes without access to affordable cover for flooding.
Properties not covered by the proposals include:
- commercially-insured privately rented homes;
- leasehold properties that are also commercially insured;
- all properties built since January 2009; and
- properties in council tax ban H.
The Leasehold Knowledge Partnership estimates that there are almost five million leasehold properties in England and Wales, more than three million of which are owned privately (almost two million in the social rented sector). The BPF press release also says that there are around 4.2 million homes in the private rented sector.
Allowing for significant overlap between these two categories of property, the total number of homes either in private leasehold ownership and/or privately rented is considered to be around 5.5 million – or around 25% of the housing stock. In reality, however, most of these properties face no significant risk of flooding.
Many leasehold properties are in city centre blocks of flats, where there is a low flooding risk, and a significant proportion of the leasehold stock is also unmortgaged. We estimate that, in 2011, there were mortgages on around 900,000 leasehold properties in England and Wales.
Some mortgaged leasehold properties are eligible for Flood Re, where leaseholder protects their homes on a domestic policy with an individual premium. This type of cover is most likely to be in place for properties in smaller blocks of flats or sub-divided houses. In other cases, however, the leaseholder will not be covered by a policy eligible for Flood Re, but by the freeholder’s commercial insurance, which might be much more expensive.
The political debate
The parliamentary under-secretary of state at the Department for Environment, Food and Rural Affairs, Lord De Mauley, has argued that the purpose of Flood Re should be “to provide support to households at high risk of flooding but without placing unsustainable costs on wider policyholders and the taxpayer.”
During the recent Lords debate, the Earl of Lytton said that the number of exclusions from Flood Re caused concern to many property owners and that “setting a limited range of property to be covered by Flood Re embeds in statute a form of market segregation.” While the intention had been to provide “cover for domestic property and small business customers,” we had ended up with a “partial retreat from that position.” He continued: “I am not clear why second homes should be within the Flood Re scheme but band H properties are outside it. That seems wholly anomalous.”
The Earl of Lytton said: “I recommend that the government urgently look into this in more detail, together with lenders and property professionals, so that Flood Re does not result in adverse consequences.” He went on to say, however, that, in the absence of any better ideas, he supported Flood Re despite “all its imperfections and limitations,” as it was the only solution currently on offer.
Initial reactions to Flood Re
It is only recently that the full extent of potential exclusions from Flood Re has become apparent. In defence of the large number of proposed exclusions, the insurance industry has argued that the scheme should not extend to “non-domestic” properties, insured under commercial contracts.
The BPF, however, argues that this is a distinction that only the insurance industry would make. Other people, it says, would regard owner-occupied leasehold and privately rented homes as being in residential, or domestic, use.
We agree with the BPF that owners of small blocks of flats occupied by leaseholders are likely to be unable to “fight their corner” in the insurance market and are therefore likely to be at a significant disadvantage if excluded from cover under the Flood Re proposals.
Similar arguments apply to homes in the private rented sector. While some are owned and insured by large property companies, a significant number are rented out by small landlords, with portfolios of only one or two properties. Premiums for commercial policies to cover flood risk could add significantly to their costs – and to those of their tenants. That would put a considerable strain on the capacity of the private rented sector to continue to help meet housing need in many local communities where there is a higher risk of flooding.
We will continue to work to raise awareness of these issues, and to press for a definition of household premises qualifying for Flood Re that includes leasehold and private rented homes, in particular. We are encouraged that the government has said it will consider the issues in more detail when the Bill reaches its report stage. Finding a solution that makes insurance more widely available is crucial, as we are sure to experience further bouts of flooding in future.
Helping communities recover from flooding will be more difficult if some homes are covered by insurance, while others are not. Patchy cover makes the process of recovery for a community affected by flooding unnecessarily drawn out. That can place an additional burden on local authorities, who may have to provide temporary housing for a longer period than expected.
Responding to concerns about the extent of recent flooding and the scale of proposed exclusions from Flood Re, our view is that:
“We find it difficult to believe that the original policy intention was to exclude a whole swathe of residential property from the stated aim of ensuring the affordable flood insurance continued to be available across the market.
“Given that this appears to be an unintended consequence, we strongly urge legislators and the insurance industry to re-consider the proposals and ensure that flood cover remains available on homes, as people would expect.”