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Flood Re now out in front as the preferred solution to looming flood insurance crisis

Submerged car

No-one produced a rabbit out of a hat at last night's All Party Group meeting on flood insurance but there was a mood of cautious optimism that the protracted, on-off negotiations between the insurance industry and the government might produce a successful conclusion before the end of the one-month extension of the Statement of Principles (SoP) expires at the end of July.

The floods minister, Richard Benyon, opened his comments referring to a potential agreement with the Association of British Insurers and the likelyhood of the already-tabled Water Bill being used as the vehicle for any legislative enactment that might be required. Pressed by Jonathan Evans, the group's chairman, who said failure to reach agreement within the one-month extension of the SoP would be "calamitous", Mr Benyon said "We have an enormous amount of agreement but haven't got some of the detail absolutely nailed down".

With the Association of British Insurers' head of property Aidan Kerr making it clear that his members were overwhelmingly committed to the Flood Re option and that this was the only option being discussed with government it seems that, at long last, this scheme is close to seeing the light of day.

The best guess is that the final sticking points are around the funding of the element that won't be picked up by the reinsurance currently being negotiated by Aon-Benfield. This will have to fall on either the Treasury, the industry or policyholders or some combination of all three. The debate is now likely to be focused on how much of this can be passed onto policyholders and the size of the policy levy that will be required to do this. Previously, when Caroline Spelman was the Environment Secretary, the government seemed reluctant to let this go much beyond around £8 per policy. Mr Benyon was at pains to stress that the cost of insurance would go up and that there was nothing the government could do about this which suggests that the government might now be a little more relaxed about the levy going over £10.

While the ABI concentrated on pressing Flood Re as the only one of the four options available that addressed both affordability and availability adequately, Graeme Trudgill from the British Insurance Brokers' Association went out of his way the reassure MPs that whichever solution – even an open market – emerges most policyholders will be able to find cover. He was able to cite some examples of people who fall outside of the terms of the SoP who have turned to BIBA and been found cover at reasonable premiums, albeit with slightly higher excesses.

Oliver Letwin Tory MPBoth the industry and the government have taken a big risk in extending the SoP for a month as it has created a heightened expectation that a deal is very close. Of course, we have been here before with Caroline Spelman raising similar expectations last summer only to find them dashed on the rocks of Treasury objections. With the current negotiations being led by the Cabinet troubleshooter Oliver Letwin (pictured), who not only has Mr Benyon and his boss Owen Paterson at the table, but also Sajid Javid, economic secretary to the Treasury, and local government minister Brandon Lewis, this is unlikely to happen again.

In terms of timescale we should be thinking of 18 July as the cut-off as that is when Parliament is scheduled to rise for the summer recess and Mr Benyon went out of his way the stress that he wanted to announce any deal to Parliament first. This would then be followed quite quickly by the publication of the additional clauses to Water Bill with a consultation period over the summer allowing the bill to start its Parliamentary passage as scheduled at the beginning of October.

The one question no-one asked last night is what happens between a deal being announced, the extended SoP expiring and Flood Re being up and running with the proper statutory backing in place. Should we expect a further extension of the SoP or will a nascent Flood Re be put in place underpinned by alot of finger-crossing that we do not have another summer like 2007 which produced £3bn of claims?


My unedited notes from the meeting are available on the Minutes and Briefings page

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