A flood of support for ABI

Standard & Poor’s (S&P) has added an interesting perspective to the debate on how to replace the Statement of Principles, a government/insurance industry agreement that ensures affordable flood insurance to the UK’s highest-risk homes.

On Monday, talks between the ABI and the government broke down after the government refused to provide a temporary overdraft to Flood Re, the ABI’s proposed replacement for the statement.

The overdraft would have ensured that the government would have topped up the fund created under Flood Re plan if a large event hit before the fund was self-sufficient.

Put simply, the government seems to object to be giving money to a cash-rich, for-profit industry in times of austerity, which is perhaps understandable.

But S&P argues that the alternative – a free-market solution with no government involvement – would be equally politically unpalatable and thus unlikely. The rating agency cites ABI estimates that 78% of the 125,000 highest-risk households are paying £290 less than the market rate.

If the free market is allowed to prevail and these households pay the market rate, S&P argues that such an increase in premiums in these difficult times would “hinder the government’s plan to increase the national housing stock”.

In other words, the government is shooting itself in the foot if it does not support schemes that would keep premiums down.

Irrespective of whether Flood Re prevails, S&P also argues that a pooling mechanism such as Flood Re, where each policyholder pays a small amount on top of their annual premium into a fund, is “the most politically and commercially acceptable”.

Insurers, which mostly support the ABI idea, are likely to welcome S&P’s assessment. They understand the use of pooling mechanisms to deal with hard-to-cover risks, as they have had the government backed Pool Re to help them cover terrorism risks since 1993.

They are also unlikely to accept any government argument that free market economics should prevail. The USA, arguably the biggest proponent of free-market economics, has the National Flood Insurance Program, because the country’s insurers do not cover flood as standard.

Insurers also feel that the government should help pay for a problem it is partly responsible for creating. After all, it allows building on flood plains and, as S&P points out in its report, has cut spending on flood defences by £95m since last year.

The government is essentially running out of arguments and time on UK flood insurance. If it is to get a solution in place before the Statement of Principles expires at the end of next June, fast action will be required.