General Insurance Article - Affordable flood insurance for businesses?

James Dalton, Director, General Insurance Policy, Association of British Insurers.Following severe flooding in recent weeks, the insurance industry’s forthcoming Flood Re scheme has once again been widely acknowledged by politicians and the public as an important long-term solution to the challenge of ensuring householders can access affordable flood insurance.

 However, there have also been misdirected calls to expand Flood Re so it does not solely cover homes but also provides a solution for businesses that might face similar issues. This was considered in detail when the scheme was originally designed over three years ago and business organisations were notable by their absence in failing to respond to the relevant Government consultations.
 The insurance industry accepts that there are some businesses, in particular SMEs, where affordable insurance is a problem due to high flood risk. However dismantling and rebuilding Flood Re is absolutely not the right way to help these businesses. Affordable flood insurance for businesses is a different problem which requires a different solution.
 There are two key reasons for this.
 First, the sheer variety of businesses and types of business property would make a commercial Flood Re scheme too complex.
 The Flood Re concept is built on households paying a certain set flood premium, which varies based on Council Tax Band. For businesses, the picture is much more complicated - even within the ‘SME’ category there is a huge variation in the turnover of businesses, ability to pay certain premiums and excesses etc. Businesses also tend to buy different types and levels of property insurance. For example, some policies will include insurance cover for stock, or significant amounts of business interruption cover, while others will not. Incorporating all of these variations in to a Flood Re scheme in a fair way would be extremely difficult.
 Second, the subsidy for insurance that Flood Re provides is much harder to justify for businesses than for households. Creating a Flood Re scheme for commercial properties would lead to situations where a corner shop in a low flood risk location would effectively be subsidising their competitor down the road at high flood risk. Not only is this a difficult ‘fairness’ challenge for Government and wider society to consider, it also significantly increases the chance of legal challenges and has potential implications for EU State Aid rules.
 These issues make the case for dismantling and rebuilding the existing Flood Re scheme to include businesses, just months before it is due to go live, entirely misplaced.
 The way forward
 While it is no comfort for those clearing up at the moment, only a small minority of businesses have trouble getting insurance because of flood risk. This conclusion was reached in a Defra report last year specifically considering the availability of commercial insurance. The FSB has recently looked to depict the issue as being more widespread, based on a survey of only just over 1,000 SMEs. Their analysis does not stand up to scrutiny and their call for the extension of Flood Re demonstrates a poor understanding of how commercial insurance works.
 For those businesses where affordable insurance could be an on-going issue, alternatives to Flood Re need to be considered that would genuinely work for these firms, in the context of the commercial insurance market. Here are three starters for ten:
  1.   Focusing more actively on mitigating flood risk to businesses. The existing funding formulae for flood risk management prioritise the protection of households over businesses. The current approach may well be the right one, but it is worth reviewing at least.
  3.   Insurance solutions that include specialist flood protection advice and take account of any action taken. We are aware the British Insurance Brokers Association (BIBA) is already looking at the potential for a market solution.
  5.   Direct Government support for affected businesses, potentially through business rates or corporation tax.
 In conclusion, when the pressure is on from flooded businesses concerned that they face a long-term future of unaffordable flood insurance, it may be tempting to look at Flood Re and assume it would be simple and effective to include businesses within its scope. However this would be using a tool unsuited to the task. The insurance industry is committed to working with policymakers and other stakeholders to consider more suitable options and to ensure that the UK remains a world leader in the provision of affordable flood insurance.  

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