The Water Bill's flood insurance obligation is misconceived and will have damaging unintended consequences, a group of insurance brokers has warned
Members of the Chartered Insurance Institute's new generation programme said in a submission to the Department for Environment, Food and Rural Affairs' consultation on Flood Re legislation that the obligation could see insurers prefer to be fined for writing insufficient high-risk flood business, rather than insure the riskiest properties.
The group said: 'We feel strongly that adherence to the obligation will require auditing, supervising and enforcing, which will bring about additional costs to the industry.
'Furthermore, the framework does not appear to address the issues of affordable premiums, which devalues the entire proposal.'
The group argued that since insurers did not want high flood risk business, the only competitive pressure to take it would come from fines imposed if an insurer did not write the required amount of business.
If the fines were severe enough, policyholders in lower risk areas would see compensating price increases because premiums for high-risk properties would be insufficient to cover the exposures and insurers would need to build up a reserve fund to meet any catastrophic flood losses.
'There is a risk, particularly if the fines imposed are not high enough, that insurers would rather accept the "known" cost of a fine as opposed to the "unknown" and potentially significant exposure to flood losses,' the group's submission said.
It also voiced concern that once a number of insurers had written their minimum required quota, there would be no competitive pressure on other insurers.
The submission said: 'It is unlikely that any insurer will want to write more high flood risk business than the minimum they are required to write, therefore at a certain point in the year the situation will arise where some markets have filled their quotas and won't be competing for the business any more, and the remaining markets who have not filled their quota will be able to charge any premium they desire knowing that the other insurers will not compete against them.'
Insurers would be likely to compete hard for the least risky of the 500,000 homes judged to be at high risk, leaving those in the worst categories uncovered.
Defra ran a short informal consultation on draft flood insurance clauses for inclusion in the Water Bill. The consultation was launched on September 6 and closed on September 20.