Budget 2020: Record flood investment, but no action on IPT

Boris Johnson’s chancellor of the exchequer Rishi Sunak today confirmed that the government will be investing a record £5.2bn towards flood defences between 2021 and 2027, after Storms Ciara and Dennis wreaked havoc last month.

During his Budget announcement this afternoon, Sunak said that this funding would be used to better protect 336,000 homes and non-residential properties, as the pressures of climate change and population growth have increased flooding.

This investment is a steep increase on the government’s current flood defence funding, which amounted to £2.6bn – the Environment Agency predicts this climb in funds will reduce the national flood risk by up to 11% by 2027.

Furthermore, Sunak allocated £120m to specifically repair the damage caused by storms this winter, such as Storms Ciara and Dennis last month.

Lastly, the government will also provide £200m over the next six years for a place-based resilience programme.

This aims to support 25 areas across the North, Midlands and South to improve their resilience to flooding and coastal erosion. The chosen areas will need to meet certain criteria, for example whether it has experienced repeated significant flooding in the past.

Relief

This news will come as a welcome relief to the insurance sector, which has been battling with unprecedented levels of flooding and storm damage-related claims in recent months.

Professional services firm PwC, for example, predicted that the cost of Storm Dennis reached between £175m and £225m, while Aviva saw claims and calls surge by 285% in February compared to January.

Insurer NFU Mutual, on the other hand, received more than 2,800 claims relating to damage caused by Storm Ciara – it estimates that it will need to pay out around £20m to customers in order to cover claims.

Defra, the UK’s Department of Environment, Food and Rural Affairs, has estimated annual UK flood losses at £500m.

Paul Higham, head of commercial property at Allianz Insurance, said: “The devastation experienced by households and business due to flooding has been more prevalent this year than ever.

“As severe weather events become more frequent in the UK, more government investment in flood defences is essential to counter the impact of climate change. We are pleased that the government has recognised this today and welcome the increased spending on flood defences.

“The insurance industry also has a key role to play by helping customers to reduce or mitigate future loss.

”The challenge has been where home and business owners would ideally like to move towards flood resilient methods of protecting their property but this has required upfront investment.

”We hope that the increase in spending on flood defences will help tackle this issue.”

James Hillon, insurance director at KPMG UK, added: “Even in March, this year has already been a devastating reminder of how damaging floods can be for households and businesses across the UK.

“The instant provision of £120m for flood repairs will be welcomed by communities affected by this year’s floods. But, the government’s increase of spending in flood defence to £5.2bn is an example of a proactive attempt to make communities more resilient and ease some of the pressure on insurers who are currently bearing a disproportionate amount of the burden.”

Coronavirus

Sunak outlined the government’s strategy for coping with the coronavirus threat.

This includes the implementation of a temporary coronavirus business interruption loan scheme, delivered by the British Business Bank, to support businesses to access bank lending and overdrafts.

The Budget report stated: “The government will provide lenders with a guarantee of 80% on each loan (subject to a per lender cap on claims) to give lenders further confidence in continuing to provide finance to SMEs.

“The government will not charge businesses or banks for this guarantee, and the scheme will support loans of up to £1.2 million in value. This new guarantee will initially support up to £1 billion of lending on top of current support offered through the British Business Bank.”

Insurers have been grappling with business interruption (BI) insurance in light of the coronavirus outbreak, with many not including cover for Covid-19 within standard policy wordings.

For example, Aviva chief executive Maurice Tulloch confirmed that Covid-19 coronavirus is not classified as a notifiable disease within its commercial business interruption policies, as the firm only offers a “minimum coverage” of included diseases.

Aviva’s business interruption policy wordings specifically excludes claims related to new and emerging diseases, which includes Covid-19 coronavirus.

This distinction to policy small print came about after the 2003 SARS outbreak, when Aviva sought to clarify what was, or wasn’t, covered under its BI insurance.

RSA, on the other hand, will potentially cover coronavirus within its BI insurance, dependent on individual policyholder circumstances and specific policy wordings – it is reported to have “a much wider definition compared to the market [of] specified disease”, meaning that more business owners could benefit from insurance coverage when faced with coronavirus-related risks to their operations.

Inaction on IPT

As for insurance premium tax (IPT), there is no news on the immediate horizon. Instead, the government confirmed that it “will shortly publish a summary of responses to the recent call for evidence on the operation of IPT, along with information on a forthcoming consultation setting out the next stage in reforming how IPT operates.”

Steve White, chief executive at Biba, welcomes this news.

He said: “We welcome new chancellor, Rishi Sunak’s approach to insurance premium tax. Not changing the current rate, already at a significant 12 pence in the pound of every premium paid, will help businesses and consumers to afford the insurance protection they need.

“We will, however, bear in mind that the chancellor has not explicitly frozen the rate and we will continue to campaign for government to freeze, if not reduce, the rate of IPT for the remainder of this Parliament.”

Huw Evans, director general of the ABI, added: “Millions of insurance customers who do the right thing and take out insurance will be pleased to see that the rate of IPT has not been raised in this Budget.

“The government should consider reducing IPT, as it is a regressive tax that hits the poorest households hardest.”

Andy Rigby, head of technical underwriting at Markerstudy, described the lack of IPT reduction as “disappointing”. 

He continued: ”As it stands today, taxes on insurance premiums account for more than £35 on a £300 premium, double the amount of tax applied in 2015. Such a high level of tax makes protection harder to afford for the general population and particularly impacts the poorest members of society, who need this cover the most.”