With only a few days before the 30 June expiry of the so-called 'statement of principles', which ensures that homeowners in flood-prone areas can still obtain insurance, there is little outward sign of progress in finding a replacement.
The recent floods in central Europe have already cost insurers several billion pounds, and a Met Office view that the UK can expect another cool, wet summer could see more flooding.
While the statement of principles has been extended for the short term, intensive discussions between the Association of British Insurers (ABI) and the government continue.
Simon Douglas, director of AA Insurance, says that in spite of the discussions he welcomes the Chancellor's commitment in the spending review on 26 June [for the 2015–16 financial year] to prioritise flood-defence spending.
"Insurers are taking a cautious view of the government discussions, and believe that the statement of principles may need to be extended further – possibly by up to six months.
"But even if a solution is reached, there will need to be a transitional period while legislation is put in place, all of which takes time.
"My view is that the ABI's 'Flood Re' proposal is the best way forward,* although it is likely to be adapted in order to reduce the Treasury requirement to underwrite whatever agreement is drawn up, possibly through the reinsurance industry.
"It is worth pointing out that many homes that were flooded last year had no previous history of flooding – so no-one is immune from that threat."
The best form of protection is flood defences. The past two years have seen new flood defences more than pay for themselves in terms of protecting homes, businesses, infrastructure and the local economy.
Simon Douglas, director of AA Insurance
Mr Douglas points out that the UK's home insurance policies are unique in Europe in that they automatically include flood cover. Elsewhere it is bought separately, and in part or wholly underwritten by the government. So in the event of major flooding, an emergency relief fund is released that is paid for through the tax system.
For example, in the recent German flooding only 20% of properties (including commercial property) had any flood insurance [ABI estimate], yet home owners can expect the government to meet the bulk of the cost of reparations.
"The German system has merit because not only does it depend on all taxpayers to help meet the cost, but the government has a direct interest in taking steps to reduce flood events to keep the costs down," adds Mr Douglas.
"For the UK, a privately led insurance solution to build a flood reserve to meet future major claims is probably the best way forward.
"But I do believe the government will need to underwrite the final outcome to a certain extent, at least during the early years. That would be vital if there is a major flood disaster soon after the system is launched, as the insurance reserve would be insufficient to meet the cost. Such uncertainty is likley a major concern for ministers.
"Yet there's no doubt that the best form of protection is flood defences. The past two years have seen new flood defences more than pay for themselves in terms of protecting homes, businesses, infrastructure and the local economy. Each successful flood defence represents a significant reduction in the costs that would otherwise have to be met not just by insurers, but also the government, local authorities and – ultimately – those homeowners and businesses affected."
Mr Douglas says that if the talks stall again then that is seriously bad news for flood-prone families, who will find it impossible to insure or sell their homes.
* Flood Re proposes that the total cost of increased flood claims is spread through a levy on insurers to provide a not-for-profit 'pool' to meet claims from high-risk homes. It would rely on all homeowners being willing to fund the potential flood costs of others through the premiums they pay – possibly by around £10 per policy.
27 June 2013