Will the industry leave flood defences exposed?

A row has broken out between the Association of British Insurers and the government over spending on flood defences. The government thinks that it has been generous while the industry, and many others, believes it falls far short of what is required. Both sides have a point.

For the last couple of years the ABI has campaigned hard for spending on flood defences to be raised from the current budget of £570m a year to £750m a year. When the severe flooding in Yorkshire and Humberside struck at the end of June, the new Environment Secretary Hillary Benn announced an increase in spending to £800m a year almost immediately, appearing to trump the ABI. Of course we know now that the increase is not immediate and will be phased in, not hitting £800m until 2010-11. Next year it will be £650m and the year after £700m. This explains partially the ABI's anger and the industry's feeling of being let down as the net effect on the spending plans is £100m lower than had been expected.

By the end of July we had another severe flooding incident, this time in Gloucestershire, and no account seems to have been taken of this in the most recent public spending announcement. Government spending has stayed the same while the insurance industry's claims costs have over doubled to more than £3bn for the two incidents, something that clearly rankles with the industry.

This argument will not go away. Mr Benn has very sensibly set up an independent review under Sir Brian Pitt to focus on the lessons learned from the floods, or 'what was done well and what could have been done better' in Mr Benn's words. It is hard to imagine that this review will not make some strong recommendations about the urgent need to better protect our infrastructure, water treatment plants and power facilities in particular. Will these be given priority over other planned, yet currently unfunded, schemes? Will schemes to protect homes and businesses be bumped off the schedule to accommodate the recommendations of the Pitt review?

Having set up the review it will be hard for the government not to back its recommendations with additional spending and you can be certain that the ABI will make that point very vigorously.

If the government does not respond positively it will be surely not be a matter of 'if' but 'when' the industry will start to withdraw cover from the most exposed of the flood-prone areas.

- David Worsfold, Secretary, All Party Group on Insurance and Financial Service.