My Lords, I thank the noble Earl, Lord Lytton, for his Amendments 89 and 90. He raises issues which I know are of concern to people and I thank all noble Lords who have spoken on all sides of the argument.
Amendment 89 to Clause 51 would require that all properties included in the calculation of the levy are eligible for the scheme. It is important to remember that while many homes in the United Kingdom are at some risk of flooding, Flood Re is designed to address an affordability issue for the 1% to 2% at the highest risk of flooding. The levy will provide Flood Re with a funding pool which will be combined with the premium income from those policies which are to be ceded to Flood Re. This will be used for the purposes of the Flood Re scheme, including the purchase of reinsurance and payment of claims. The purpose of having a pool, as is the case for much of our taxation, is that costs are shared by many so that those most in need can benefit. If everybody who paid the Flood Re levy stood to gain, there would be fundamental implications for the required amount of the levy. Alternatively, if the levy was limited to flood-prone households, the pool would not be large enough to have a significant impact on prices and therefore on the affordability of flood insurance.
The insurance industry has been clear that low-risk and no-risk householders have historically subsidised flood insurance for those at a higher risk of flooding and that the move to risk-reflective pricing will over time remove this cross-subsidy from the market. The
levy simply replicates and formalises this existing cross-subsidy. Indeed, the ABI has assured us that the levy can be introduced without having an impact on bills in general for householders at a low risk and no risk of flooding, for those in band H or for those with properties built after 1 January 2009—that is, those outside the pool.
If I understand the noble Earl’s intention correctly, I think he is particularly concerned to ensure that those properties which are not eligible for the scheme—such as band H properties, properties built after 1 January 2009 and certain leaseholders on commercial policies—either stand to benefit from Flood Re or do not pay the levy. While I understand that cross-subsidising something from which you will receive no benefit might be perceived as unfair, I have explained why there always have to be some net contributors to make a pooling system work, and this includes the overwhelming majority of households at low risk or no risk of flooding. We discussed the rationale for the scope of Flood Re at length in Committee, and I explained that we think that we have got the balance right. The Government’s approach was widely supported in the response to the 2013 consultation. This approach means that those who are most in need of support will receive it to enable a smooth transition to the free market.
The noble Earl commented on the complexity of the scope of Flood Re. The proposed criteria reflect the current situation for purchasing a domestic insurance policy. We are not seeking to change the circumstances under which insurance is purchased through Flood Re. We must remember that Flood Re is designed to help those people at the highest flood risk, which we estimate could be around 500,000 households. I have heard some very fanciful numbers being bandied around, and they all miss this point. I am not saying that the Government are not still listening to the debate. We will monitor the market, as will the ABI, and we will publish our findings. Should the evidence point to specific issues with insurance for particular sectors, we will discuss with the insurance industry what might be possible.