Flood Reinsurance (Amendment) Regulations 2025

Considered in Grand Committee

15:45:00

Moved by

That the Grand Committee do consider the Flood Reinsurance (Amendment) Regulations 2025.

My Lords, as most noble Lords will know, Flood Re is a reinsurance scheme that provides for accessible and affordable flood insurance for eligible households. It is a joint government and industry initiative launched in 2016, designed to improve the availability and affordability of UK household flood insurance. For clarity, Flood Re Ltd is the name of the company established to administer the scheme. Since its launch in 2016, it has provided cover for flood insurance to more than 500,000 households that are at risk of flooding right across the UK. Before Flood Re, only 9% of policyholders with a prior flood claim could get flood insurance quotes from two or more insurers, and none could get quotes from five or more insurance companies. Some 99% of households at high risk of flooding can now obtain quotes from 15 or more insurers. The Flood Re scheme has evolved since its launch back in 2016. When levy 1 was last reviewed in 2022, the regulations were changed to allow for Build Back Better to be included in the scheme, which allows for up to £10,000 to be offered as part of a post-flood claim to install flood-resilient measures at the property, helping to manage down the risk and impact of any future flooding. I am pleased that insurers representing some 77% of the UK household insurance market are now committed to offering Build Back Better to their customers, whether they are Flood Re-ceded policies or not. The Flood Re scheme is a joint initiative between government and the insurance industry, and we are going further than the previous Administration to invest in flood defences. As part of this Government’s plan for change, a record £2.65 billion has been committed to better protect 52,000 properties by March 2026. Maintenance of existing flood defences will be prioritised, ensuring that a further 14,500 properties will have their expected level of protection maintained or restored. This means that a total of 66,500 properties will benefit from this funding, which will help to secure jobs, deliver growth and protect against economic damage. I turn to the specifics of the statutory instrument. Flood Re Ltd regularly and continuously monitors the risk and market that it is supporting to ensure that it is in a position to continue to enable affordable flood insurance for those that need it. To do so, it is required to purchase reinsurance, which it does on a three-year basis. Taking into account changes to risk, claims profile and expected increase in the number of household flood insurance policies ceded to it, Flood Re Ltd has projected that its liabilities could increase from £2.1 billion to at least £3.2 billion over the next three years, and this is the level of cover that it now needs to purchase. In addition, the global reinsurance market has become more challenging since Flood Re Ltd last negotiated its three-year reinsurance cover. Events around the world have impacted on the risk appetite of those providing reinsurance, meaning the market that Flood Re Ltd can purchase from is both more volatile and more expensive than previously. All those factors combined have resulted in Flood Re Ltd proposing this increase to levy 1, so that it can afford to purchase the required reinsurance and continue to provide that access to affordable insurance that we all recognise the need for. I assure noble Lords that this proposal has been well scrutinised before reaching this Grand Committee for your Lordships’ approval, not only by policy and finance officials in Defra but by our colleagues at HMT. This scrutiny has been informed by advice from the Government Actuary’s Department, which has provided its opinion that the increase to levy 1 is necessary to ensure the viability of the scheme. I recognise that any increase to costs is unwelcome at any time. The cost of increasing levy 1 is spread across all insurance companies that offer UK household insurance and is proportionately split based on their market share. We can be confident that Flood Re Ltd has done its due diligence in seeking this increase and reassured that it would not be being asked for if it were not needed. By using existing capital, Flood Re is keeping the increase to 18%, while the costs for reinsurance are expected to more than double. The decrease that was put in place three years ago, going from £180 million per year to £135 million per year, demonstrates, I suggest, that Flood Re Ltd is very conscious of its responsibilities in keeping the levy as low as possible. In summary, this statutory instrument allows for a necessary change to the Flood Re scheme by amending Regulation 8(2)(a) of the Flood Reinsurance (Scheme Funding and Administration) Regulations 2015 to increase the levy 1 placed on UK household insurance providers from £135 million to £160 million from 1 April 2025. I emphasise that the measure in this instrument is necessary to ensure the effectiveness and continuation of the Flood Re scheme and its ability to provide affordable flood cover for the increasing number of homes that are at risk of flooding in the UK. I beg to move.

My Lords, I thank the Minister and congratulate her on bringing this instrument forward, which I wholeheartedly support. I want to press her on a number of issues arising from it. In the last Parliament, the Minister had the grace and good sense to support an amendment of mine to what is now the levelling-up Act. It stated that there should be no homes at all built on functional flood plains after 2009. As the Minister will be aware, and as this instrument states, there is no insurance cover for homes built on functional flood plains after 2009. At the time, I was delighted that Flood Re was set up, with the support of the present Government, by the then Conservative Government. However, the mapping is not as tight as it might be. As we discussed during the passage of the levelling-up Bill, we are dependent on local authorities to home in on the crucial area of zone 3b. If the Minister and her Government are committed, as they seem to be, to continuing to build on functional flood plains, which we recognise are not covered by Flood Re, can she tell the Grand Committee the average cost of insurance for those home owners to insure themselves, particularly where they may have been flooded on one or more occasion since they moved into a home which was built after 2009? I believe that we should look at this in the context of Flood Re and the housebuilding programme. I know the Minister will probably tell me that I must be patient and wait for the planning and infrastructure Bill to come out—perhaps she could give us a date for when to expect it. That is my first and key point: what insurance cover there is, the cost for individual households and to what extent they might benefit. Has the department done an impact assessment on the instrument as it stands? Is the Minister able to say what plans the Government have to extend the scheme in a number of ways—first, to cover homes built on flood plains after 2009 going forward, but also to extend it to cover businesses in particular? I am not entirely sure what the position is as regards farms, which are partly a business and partly a residence, but there are other businesses as well—many owner properties—where the business and the home are shared. When will the Government have a view on what the future of Flood Re should look like when it reaches the end of its natural life? When this instrument was discussed in the other place, my honourable friend Dr Neil Hudson, who speaks for the party there, asked about the frequently flooded allowance, which was introduced by the last Government as a ring-fenced fund of £100 million to protect areas that had been affected by repeated flooding. Is the Minister able to say whether the Government are minded to continue that programme going forward? I am sure that, when responding, the Minister will say that the Government have improved the resilience of properties and therefore are quite entitled to encourage local authorities to build on functional flood plains. She was, sadly, unable to attend the launch of the report by Westminster Sustainable Business Forum—Policy Connect—in which we looked at flood and coastal erosion risk management policy for the new Government. I do not know whether the Minister has had a chance to look at this, but will her department especially consider our recommendations to ensure the uptake of property flood-resilience measures, some of which come under Build Back Better, to which she referred—but they also go beyond that? Will the Government be minded to allow for the installation of both resistance and resilience measures as part of property flood-resilience schemes funded by the Environment Agency? Will she also review the eligibility criteria and distribution process for the property flood-resilience repair grant scheme to make it more widely accessible and streamlined? Further, will the Government align all property flood-resilience funding resources—including those from the Environment Agency’s property flood-resilience framework, Flood Re’s Build Back Better and Defra’s flood-resilience repair grant—to the same amount, so that all the funding resources would be aligned at £15,000, possibly as part of the forthcoming multiyear spending review? I realise that these are very technical recommendations and that the Minister may not have the answers, but they relate to the instrument and the forthcoming spending review. Finally, the recommendation that I press to the Minister today would be to normalise the use of property flood resilience in both new and existing properties. Part C of building regulations should be updated to require the installation of basic property flood-resilience measures for properties at risk of flooding and the installation of very basic no-regret measures for all new homes, irrespective of risk. These recommendations go to the heart of my belief that, if we continue to build properties that are not covered by Flood Re, we owe this to the people who will buy those properties. I find myself not needing a mortgage: I had sold a property, and I was in a position to have bought, and I almost did buy, a property without a mortgage—this is going back to the 2000s. No one would have told me that I could not be insured. I know the Minister will say that they can be insured, but I would be interested to know how affordable it is for these properties not covered by Flood Re and built after 2009 on flood plains. How expensive is that insurance? If the Government are going down this path, we must have more resilient houses built in those areas. That said, I welcome the opportunity to debate the instrument today. I hope it will have a fair wind and be approved.

My Lords, I thank the Minister for her introduction to this short but important statutory instrument. I was assisting on the Water Bill in 2014-15 when Flood Re was first debated to provide insurance to properties that were uninsurable due to constant flooding, the main insurance companies not being willing to take any of the risks on those homes and dwellings. This SI is quite simple: it raises the levy that insurance companies can indirectly pass on to their customers from £135 million to £160 million. The £135 million level was set in 2022, when the levy was reduced from £180 million. The Explanatory Memorandum quite rightly states the importance of not having a levy that is higher than it needs to be, but I stress that there is a danger in setting it too low.

16:00:00

Everyone is aware of the effects of climate change. We see drought affecting some areas but, more often, communities are flooded due to excessive rain and storms. The emergency services are overwhelmed, and households are often under water for considerable periods of time. Is it wise, therefore, to reduce the levy from £180 million, when climate change is predicted to make the climate of our country much wetter? I wonder what the rationale was for reducing the levy from £180 million to £135 million in 2022; it was a considerable drop. The Government are now proposing the levy go back up to £160 million. Is the Minister sure that this will be sufficient?

Paragraph 5.4 of the Explanatory Memorandum states:

“The cost of increasing the Levy 1 will be indirectly passed on to the customers of the insurance companies, who are members of the Flood Re Scheme”.

I do not want to unnecessarily prolong the debate this afternoon, but I would like to know how many insurance companies are not currently members of the flood reinsurance scheme. The Minister has indicated that 75% of insurance companies are in the scheme, which indicates that roughly 25% are not. Can the Minister please confirm this? Are there any plans for this 25% of companies to join in the future? That apart, I fully support this statutory instrument.

My Lords, I, too, thank the Minister for introducing this statutory instrument to ensure that flood reinsurance can continue to operate effectively. For that reason, His Majesty’s most loyal Opposition are pleased to support it. Although the measures are necessary, they raise several questions about the future of the Flood Re scheme and the Government’s broader approach to flood risk and resilience. The flood reinsurance scheme established under the Water Act 2014 was designed to provide much-needed reinsurance for household insurers facing flood risk, ensuring the availability and affordability of flood insurance for properties at risk of flooding. This initiative, introduced by the previous Conservative Government, remains a crucial safety net for many home owners across the country. It has offered vital support as we face increasing flood events that threaten the stability and safety of homes across Britain. However, we must recognise that the scale of flooding is rapidly increasing. Recent assessments by the Environment Agency indicate that approximately 6.3 million properties in England are at risk of flooding from rivers, seas or surface water. This is projected to increase to 8 million properties by 2050, reflecting the escalating threat posed by climate change and extreme weather events. This highlights the importance of ensuring that the Flood Re scheme is sufficiently robust to support the growing number of home owners at risk. The statutory instrument proposes an increase in the total levy from £135 million to £160 million. The Government’s assessment indicates that this rise will likely be passed on to consumers, resulting in an estimated increase of £1.60 per household insurance policy. Although this increase may seem modest on an individual basis, it raises concerns about the cumulative effect on policyholders, especially those already facing higher premiums due to rising costs in other areas. This adjustment reflects the growing challenges the scheme faces in a world where extreme weather events are becoming more frequent and severe. His Majesty’s Official Opposition acknowledge the necessity of this adjustment, given the financial pressures on reinsurers, driven by factors such as inflation, global natural catastrophe claims and the need to preserve the scheme’s financial resilience. If the rate and risk of household flooding continue to rise, can the British people reasonably expect these annual increases in insurance premiums to become the norm? I have several other key questions for the Minister today. First, can she confirm whether the Government have consulted with industry stakeholders about the feasibility of expanding the Flood Re insurance scheme, particularly in high-risk areas and to houses built after 2009? I am most interested in the Minister’s response to my noble friend’s question regarding farmhouses and buildings. Although these are likely to have been sited in less flood-prone locations, the Government have made significant commitments to building 1.5 million new homes in the coming years, a substantial increase on the recent rate of building completions. As my noble friend Lady McIntosh of Pickering highlights, how does the Minister intend to protect these new homes from flood risk, particularly those in high-risk areas? Will the Government commit to ensuring that all new developments are designed with flood resilience in mind? Could the Minister confirm and explain the role she sees for nature-based solutions in the management of floods at a catchment level in future? Here, I declare my interest, as set out in the register, as the owner of land in a number of river catchments. Finally, can the Minister inform us what progress is being made in the transition from Flood Re to risk-reflective pricing for household flood insurance when Flood Re expires in 2039? We are approaching midway in the life of Flood Re and it would be desirable to see some progress. These are questions that go to the heart of the Government’s approach to flood risk, resilience and insurance. While we understand that the increase in the levy is a pragmatic measure in the light of global challenges, we must not overlook the broader implications of a changing climate and the evolving risks that flood-prone households face. With that, I look forward to hearing the Minister’s response to these questions.

My Lords, I thank noble Lords who have taken part in this debate today. Personally, I was very pleased when Flood Re came in; I thought it was incredibly important legislation. Anyone who has lived in a house that has flooded, like I have, and in communities that flood, will know how very important it was that we had this insurance scheme come into place. I therefore thank noble Lords who have supported this small but extremely important SI today; it is important that the scheme stays viable and continues. I would like to try to cover most of the questions that have been asked. There has been a desire for government to look at whether the scheme can be extended; that came across clearly from all who took part. Before I go into the particular individual responses and specifics, let me say that although we have no plans to make changes right now, we are continuously keeping all our policies under review, including those relating to flooding insurance. It is important that we discuss, debate and listen to others as we move forward in how we make those decisions around policy changes. If we make any changes to the scheme in future, it would be important that we secure the appropriate reinsurance for that, which would be challenging in the current market. To put it into context, this would mean that the levy we are talking about today would then need to be increased even further. I know that noble Lords are aware that, currently, leasehold properties with three or fewer units, where the freeholder is living in one of those units, qualify for Flood Re building insurance. The problem with larger blocks not being eligible is that they are considered to be commercial businesses, and that is why they fall outside of the scope of Flood Re. The Flood Re scheme as it is set up at the moment, and as it will continue to be set up through the statutory instrument in front of us, is funded by the providers of household insurance, not those who underwrite commercial policies. Buildings insurance is the responsibility of the freeholder and kept separate. However, I recognise that there is a problem. When Main Street in Cockermouth flooded, for the second time in only six years, I held meetings with business insurance companies and high street businesses to look at ways we could move forward, because there are still alternative things that we can do and that the Government can look to support. Having said all that, and with properties built after 2009 having been referred to—the noble Baroness knows that that is something that I was concerned with—we are planning to explore this further. Minister Hardy, who is the Minister responsible for this area, has asked Flood Re to look into the matter to understand the scale of concern and how industry might respond, to ensure that those living in properties that currently do not come under the scheme could be provided with appropriate insurance cover. Although it is not in front of us today and not something we are actively looking at, we have asked for this to be considered further. In the meantime, contents insurance policies can be applicable, so there is that potential as well.

The Minister may be coming on to this, in which case I apologise, but do we know what the policy would cost? I visited Cockermouth and Keswick after the floods in 2009—I have suddenly had a nightmare that I did not tell whoever the MP was that I was there, but we will gloss over that. Many of those people could not afford contents insurance, yet they were clearly at risk of flooding. Does the Minister have a figure, or could she provide one in writing?

I do not have the figure at my fingertips. This is something we are looking at. We have asked business insurance companies and the scheme itself to look at what those costs are, because if we are to consider broadening it then we need to understand the costs. I cannot provide that figure to the noble Baroness today, but it is something that we are considering. I will move on to some other areas that were mentioned. Planning and the Government’s housebuilding programme was referred to. As noble Lords know, we have committed to building a large number of high-quality, sustainable homes. If noble Lords have not read the National Planning Policy Framework, I strongly urge them to do so. Flooding and the environment are very much part of that document. When I read it, I was pleased that the concerns that Defra had raised had been taken account of and included in the document. Flood risk is an important consideration in the planning system. The NPPF is clear that: “Inappropriate development in areas at risk of flooding should be avoided by directing development away from areas at highest risk”— and that includes flood plains. Where development needs to be in locations where there is a risk of flooding, as alternative sites are not available, local planning authorities and developers should ensure that development is appropriately flood-resilient and resistant and is safe for its users for the development’s lifetime, and will not increase flood risk overall—a really important point that the noble Baroness knows I have talked about quite a lot previously. On the point made by the noble Lord, Lord Roborough, about nature-based solutions, we are committed to that. The noble Baroness, Lady McIntosh, asked about farms. We know that agricultural land and businesses can be seriously affected by flooding and coastal erosion; we have seen it too often in recent years. There are two points here: getting your land insured and managing your land—and managing it in order to reduce the risk of flooding and coastal erosion. Farmland has a really important part to play in that aspect. In the floods investment programme, the amount of funding a project can attract depends on the damages it will avoid and the benefits it will deliver. Agricultural land is an important part of calculating that, and we hope that farmers will take up those opportunities. An additional financial report will be provided to rural communities to recognise the significant impact of flooding on farms. We are monitoring closely the impacts of flooding caused by storms on the agricultural sector; that work is going on at the moment with the Environment Agency.

16:15:00

The noble Baroness, Lady McIntosh, asked about the future of Flood Re. Flood Re Ltd is required to undertake quinquennial—that is a good word—reviews; that is, every five years. It published its second QQR, as they are called, in 2024. As part of that, it is required to consider the transition in 2039, so we are already looking at what will happen then.

The noble Baroness, Lady Bakewell, and the noble Lord, Lord Roborough, asked about costs. Obviously, it is for insurance companies to manage the cost of the levy. Some are likely to pass the cost of increasing levy 1 on to household policyholders, presumably across all policyholders. Where they do, Flood Re estimates that the scale of the increase will be around £1.50 per policy per annum, as the noble Lord, Lord Roborough, referred to. The current cost across all household policies is understood to be approximately £7.88.

The noble Baroness, Lady Bakewell, asked about the 25% figure for insurers that are not part of the scheme. That is the latest data we have. Clearly, we would like to encourage more companies to be part of the scheme; the more people who are involved, the better.

On costs, it is important to say that increasing levy 1 not only ensures that Flood Re can continue to purchase reinsurance but minimises the risk of Flood Re needing to implement a levy 2 on the industry. If you look at Flood Re’s financial projections for the next three-year cycle, you will see that the failure to increase levy 1 will cause problems for businesses being able to provide insurance more broadly to UK households. It is important to say that this figure has been properly considered in order that the scheme continues to work effectively and to provide the level of insurance that is required. The problem is that, if we do not get the insurance levels right, insurance companies then put excess on and things become completely unmanageable for householders, which is what was happening before the scheme came in. It is really important that we get this right.

To conclude, I assure noble Lords that we are very keen to make sure that we have a competitive scheme that works for householders, so that people who have been flooded are as protected as they can be and so that they use Build Back Better—that is a really important part of it. Once again, I thank noble Lords for their support for this SI. I look forward to seeing it come into place, so that we can continue with this really important scheme.

Motion agreed.