Water Bill

Lord Whitty Excerpts

Tuesday 11th February 2014 Lords Chamber

Moved by

[Lord Whitty]

154: After Clause 50, insert the following new Clause—
“Onshore oil or gas activities: effect on water environment
In Part 1 of Schedule 5 to the Environmental Permitting (England and Wales) Regulations 2010 there shall be inserted after paragraph 13—“Onshore oil or gas activities—effect on water environment13A (1) Without prejudice to the operation of Regulation 35(2) and paragraph 5(1)(d) of Schedule 10 and of Regulation 35(2) and paragraph 7(j) of Schedule 20, the regulator shall refuse an application for the grant or variation of an environmental permit or for the transfer in whole or in part of an environmental permit if—
(a) the regulated facility to which the application for or transfer of the environmental permit relates is to be carried on as part of an onshore oil or gas activity; and(b) the regulator is not satisfied that the applicant or the proposed transferee has made or will make adequate financial provision for preventing or mitigating pollution of the water environment, by ensuring all of the following—(i) operation of the regulated facility in accordance with the environmental permit;(ii) compliance with any enforcement notice or suspension notice or prohibition notice or mining waste facility closure notice or landfill closure notice which may be served on the applicant or transferee by the regulator under these Regulations;(iii) compliance with any order of the High Court which may be obtained against the applicant or transferee under Regulation 42 for the purpose of securing compliance with any of the notices listed in sub-paragraph (ii);(iv) compliance with any order of any court issued under Regulation 44 against the applicant or transferee; and(v) recovery by the regulator of its costs upon any exercise of its power against the applicant or transferee under Regulation 57;(c) for the purpose of this paragraph “onshore oil or gas activity” means any activity for the purpose of exploration for or extraction of onshore oil and gas;(d) for the purpose of this paragraph “adequate provision by way of financial security” means financial provision which is sufficient in value, secure and available when required.”.”

[Lord Whitty (Lab)]

My Lords, before we get on to this afternoon’s main business of flood insurance, I have down one amendment, relating to environmental regulation, which concerns the effect that fracking will have on the water supply system. This has been a major concern in another place for a number of Members of Parliament, who have local problems about the impact that any major expansion of fracking might have on watercourses and water supplies.

I do not intend, this afternoon, to open up the whole debate on the importance or otherwise of fracking, what its effects might be and whether we could repeat, in the UK and Europe, the experience of the United States. For what it is worth, I doubt that it will be transformational, but it will be important and will produce some significant gas and oil in this country. That will need to be tightly regulated by the Environment Agency, the HSE and local planning systems. In particular, water supplies and watercourses will need to be protected and, if anything goes wrong, fracking companies will have to be seen to be clearly liable.

On the relationship between fracking and water supplies, there are three main issues. First, there could be pollutants released, potentially, into water systems and aquifers by the fracking process—that is, the chemicals contained in the fluids that are used in the hydraulic fracturing process. There are also naturally occurring contaminants which could be released from the shale itself, including naturally occurring radioactive contaminants. There could also be fugitive emissions released into ground-water, particularly of methane. All of those could have serious effects on water quality, ecology, habitats and water supply. To a greater or lesser extent, all have been experienced in the United States, although on a limited basis.

Secondly, if the fracking industry develops on any scale, for the purposes of shale extraction fracking will also require major abstraction of water from the system. As we have already stressed in previous days in Committee, the urgency of reform of the abstraction system needs to take into account the impact of mass fracking on abstraction levels and hence on already stressed catchments. This is linked to amendments we discussed the other day. For example, if fracking companies take up the headroom in existing licences in particular catchments, then a lot of catchments could be in serious trouble, if they are not already.

Thirdly, there is the requirement for the cleaning and treatment of the water that has been used in fracking, which will need to be decontaminated.

Amendment 154 really focuses on the first of these effects, and to some extent the third, but all three are important for the water system and need to be taken into account. It is vital that we protect ground and surface water. For example, in the south of England, 70% of the water supply depends on healthy aquifers. This includes drinking water as well as water for industrial and agricultural use. Frankly, the American experience, though variable, is not completely reassuring. In another place, my colleague Joan Walley quoted an example from Pennsylvania, where methane was found in 82% of drinking water samples. We need to be reasonably confident that our regulators, the Environment Agency and the Drinking Water Inspectorate, will operate a much more effective regulatory regime here in the UK than has been operated in certain parts of the United States. Even so, and with a fairly high degree of confidence in our regulators, disasters—or at least leakages—may well happen.

We have a history of earlier energy sources to instruct us: the legacy of coal mining and, in a somewhat different vein, the earlier phases of the nuclear industry. Not only can pollution occur, we have seen the inability of the organisations that produced the pollution to finance the decontamination and the clear-up, which have required very substantial sums. We all support the “polluter pays” principle in theory, but we also have to ensure that the polluter can pay. In both coal and nuclear, it has in effect fallen to the taxpayer to pay for the clear-up over the past few decades, and that is still going on.

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[The Parliamentary Under-Secretary of State, Department for Environment, Food and Rural Affairs (Lord De Mauley) (Con)]

My Lords, as the noble Lord, Lord Whitty, has explained, Amendment 154 would require onshore oil and gas operators to provide financial security when applying for an environmental permit so that funds would be available to deal with any water pollution incident caused by the operator. The amendment would impact on both the conventional and unconventional oil and gas sectors. It would address any pollution that they caused to the water environment but not any other damage that might be caused by their activities.

We want a successful industry in this country—an aspiration supported at Second Reading—to provide us with an important source of gas for our future, but it is vitally important that it is safe. We already have a well established UK conventional onshore oil and gas industry that has happily coexisted with local communities, in some cases for half a century or more. This has been achieved not least because the industry has maintained a good record of environmental responsibility and competence. The existing controls and the application of good operational practice have served us well to prevent pollution from onshore oil and gas activities and to tackle in an appropriate way any problems that emerge.

The Department of Energy and Climate Change assesses as a matter of course whether a company has sufficient funding for its planned operations prior to awarding any licence. It also checks at the drilling stage and, where relevant, at the production stage that the company has appropriate insurance. Similar financial competence checks are also carried out by the Environment Agency as part of the permitting process. In the event of serious damage to surface or ground-water, the Environment Agency and Natural Resources Wales have powers, under the Environmental Damage (Prevention and Remediation) Regulations 2009 and the equivalent Welsh regulations, to serve a notice requiring that the polluter pays to clear up the pollution. If a significant environmental risk becomes apparent, the Environment Agency has the authority to stop the activity. These powers apply to a wide range of operations and activities undertaken by different industries. I do not think that it would be appropriate to create any specific provisions for the oil and gas industry.

However, the Government are aware that there are widely felt concerns about the capacity of companies exploring for shale gas to tackle any liabilities that might arise. This is the concern that the noble Lord, Lord Whitty, is pointing to. Therefore, I am pleased to inform your Lordships that the Department of Energy and Climate Change and the shale gas industry are working to put in place a robust scheme that would cover liabilities even if the relevant operator is no longer in business. They are also in discussion with leading insurers about proposals to build expertise and capacity in the insurance market to facilitate the development of products specifically appropriate for unconventional operations, which in turn could facilitate the development of an industry-wide scheme. In addition, while we already have a robust regulatory framework in place, I can confirm that it will be reviewed and refined as appropriate as we move towards the production phase. The question of the noble Lord, Lord Oxburgh, will be addressed in that process. This regulatory review will include the question of environmental liabilities in the wider sense, not solely relating to water.

I am sure that noble Lords will agree that these two initiatives, taken together, constitute a sensible approach towards ensuring that liabilities are covered in a comprehensive and proportionate way, rather than taking what might be a rigid legislative approach on a piecemeal basis. I hope that this news provides the reassurance that the noble Lord, Lord Whitty, needs that the Government are taking the right steps to ensure that liabilities are dealt with appropriately, and that he will feel able to withdraw his amendment.

[Lord Whitty]

My Lords, I thank the Minister for that. It is a degree of reassurance. I thank the noble Lord, Lord Oxburgh, for expanding the area of concern into the issues of the effect that bringing sea-water on land for use may have on watercourses and the possibility of contamination of the sea-water itself.

There is the potential for such a widespread effect on the water system that I feel justified in bringing this amendment before the House. I am pleased to hear the Minister say that the industry, the insurers and the Government are looking at a scheme. This obviously recognises the very widespread concern in the country about the possible impact of fracking which, he is right to say, is wider than the issue of the effect on the water supply system.

I am still slightly concerned that we might get into a situation where, if the industry develops to the degree that many of its advocates suggest is possible, we end up with a substantial problem—a problem that could end up on the taypayer’s desk or bank account. In the nuclear industry we have provided for such a possibility for current operations, although obviously there is a huge legacy that has not been provided for and a huge bill for the taxpayer as a result. We have done the same on a much lesser scale in relation to landfill. We could probably also establish a regime in relation to fracking to ensure that this liability was covered. However, the Minister has indicated that there is some progress. I will watch this space, as I am sure will others. At this time, I beg leave to withdraw the amendment.

Amendment 154 withdrawn.

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[Lord Whitty]

My Lords, in her opening remarks, the noble Baroness was correct to set this matter in the broader context of where we are now, and have been in recent years, with instances of serious flooding in Somerset this week, possible serious flooding in Surrey by the end of the day, that which occurred in Keswick not long ago; and the resources that are needed to ameliorate that position in the long term which are, essentially, the resources that the Government are putting in. We will no doubt return to that issue at some stage in these proceedings. However it raises the question of whose responsibility this is. I have slight reservations about these amendments in that regard. The public authorities and the Government have responsibility for ensuring that adequate resources are available for flood defence and catchment management to mitigate the impact of flooding and insurance and reinsurance schemes can help through their normal operations. However, insurers can insist on mitigation or flood recovery measures along the lines mentioned by my noble friend Lord Campbell-Savours as a condition of renewal or extension of policy cover or as a deduction, if you like, from compensation. That is a normal insurance operation.

These amendments seem to be saying that Flood Re would take on some public responsibilities and social objectives and have executive responsibility for delivering flood limitation measures. It is important and right that Flood Re should co-operate with the public authorities, landowners and everybody else in this area, so in that sense I support Amendment 156B. However, it is also important that we do not transfer the risk from public authorities and property owners to an insurance system which, at the end of the day, is viable only if it takes a cut from all policyholders, including those whose properties are not at all at risk of flooding.

This is a difficult issue. The noble Baroness referred to public money. In one sense public money is involved because we are legislating for the system and the Treasury will, therefore, regard the expenditure involved as public money, but it is not really public money—it is the policyholders’ money. At the end of the day, you cannot place too many responsibilities on the Flood Re operation when it is dependent on individual households and businesses paying into it for insurance purposes.

It may well be that a surplus is generated and that the assessment of who pays for flood defence is looked at more broadly. Clearly, there are limitations on public expenditure and expenditure on better flood defence and catchment management could be met by those who are the most direct beneficiaries of it. You could argue that insurance companies themselves benefit from fewer claims as a result of more effective flood defence, but that is a slightly wider argument than placing the statutory responsibilities for which these amendments ask on to Flood Re itself. I think that that is slightly going round the back door.

As I say, I am slightly torn on this issue because I agree with a lot of what the noble Baroness and the noble Lord, Lord Shipley, said. However, I think that we would probably place too much responsibility on Flood Re if we adopted all these amendments.

[Lord De Mauley]

My Lords, I am grateful to my noble friend Lady Parminter for her amendments regarding flood resilience and Flood Re’s role in that matter, and to all noble Lords who have spoken. Regarding Amendments 154A and 154B, I agree with my noble friend Lord Shipley that we need to tackle the root cause of the difficulties with the availability and affordability of flood insurance—the flood risk that households face. The coverage of the tragic events of the past couple of months, which my noble friend Lady Parminter mentioned, have brought the full impact of this home to us all. I thought that the letter read out by the noble Lord, Lord Campbell-Savours, set out the problem very well.

Households benefiting from Flood Re need to understand both their flood risk and the likely impact of the withdrawal, over time, of the subsidy on their future premiums. I hope that noble Lords will be reassured to hear that we have agreed with the Association of British Insurers the principle that insurers will be required to provide such information to customers when a property is ceded to Flood Re and at the point of a claim. I hope that the statutory requirement for the Flood Re scheme to manage, over the period of the operation of the scheme, the transition to risk-reflective pricing of flood insurance for household premises also offers some reassurance.

The ABI has now come forward with draft proposals for ensuring that the correct incentives are in place to drive uptake of resilient repairs after a flood, particularly for those properties subject to repeat flooding. We are still agreeing the detail of this approach and I hope to have more to say on Report. Encouraging households to become more resilient over the period of the scheme will help to reduce the impacts of subsequent flooding.

Turning to Amendment 156A, the subsection that my noble friends seek to amend has been drafted in such a way to provide firm pointers as to what the Flood Re scheme administrator would need to have regard but is also intended to allow for a degree of flexibility that may be needed as the scheme is finalised. I assure noble Lords, in the strongest terms, that the Government are absolutely committed to taking forward Flood Re, together with the insurance industry, and that both parties are working very hard to achieve this.

We expect the administrator to act responsibly in its management of the scheme throughout its life and we have every intention of ensuring that it discharges its functions in a proper manner, supported by the duties we will place in secondary legislation. The regulations made under Clause 54 will be subject to public consultation and we are currently considering carefully the Delegated Powers Committee’s recommendation that regulations made under this clause should be subject to the affirmative procedure. I trust that this assurance puts on the record our intentions in this regard.

As regards Amendment 156B, my noble friends are right that co-operation between Flood Re and flood risk management authorities will be important, in particular should Flood Re wish in the future to commit any of its resources to supporting flood risk mitigation measures. Clause 54 provides for Flood Re to share information held by it with the Environment Agency, its equivalents in devolved Administrations and any other bodies specified in regulations. It also provides for Flood Re to have a duty to act in the public interest, so where it is in the public interest for Flood Re to co-operate with other risk management authorities, it would be expected to do so.

Under the Flood and Water Management Act 2010, flood risk management authorities have a duty to co-operate with each other in the exercise of their flood and coastal erosion risk management functions. This is because the causes of flooding can cross organisational boundaries and responsibilities. For example, flood risk management schemes to protect one area may make the problem worse elsewhere if there is not a partnership approach to developing solutions. Flood Re will not have an operational role in designing or implementing flood risk management schemes. As I think the noble Lord, Lord Whitty, suggested, that would be beyond the scope of Flood Re and would require different skill sets. Flood Re will therefore not have the same degree of interaction with the risk management authorities that they will have with each other. I am not convinced that there is a need to extend the requirements based upon the Flood Re body.

Perhaps I may say to my noble friend Lord Cathcart that while directly managing flood risk is not the purpose of Flood Re, it is nevertheless vital that Flood Re does not just deliver affordable flood insurance. It should also contain the right incentives for householders and insurers to put in place the necessary measures to become more resilient, since otherwise the effective price limits in Flood Re may remove some of the financial incentive to take such action. He has suggested—the noble Earl, Lord Lytton, also asked about this—that Flood Re will need to build up its reserves, which is of course right, but it will have access to the proceeds of the levy and be able itself to take out reinsurance. Can I offer to meet noble Lords before Report, on which occasion I shall of course be happy to provide an update? Perhaps I could also address the point made by my noble friend Lord Crickhowell at this stage. I shall come back on Report to noble Lords with more details of how those who flood repeatedly might be treated. For the reasons I have outlined, I hope that I can persuade my noble friend to withdraw her amendment.

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[Earl Cathcart (Con)]

My Lords, I congratulate my noble friends Lord Moynihan and Lady Parminter on tabling Amendment 155, as it has given us a good chance to debate flood insurance for businesses, whether in Flood Re or in another mutual set up specifically. We are all under pressure to include small businesses under the Flood Re scheme. That is quite understandable. If I had a business in a flood risk area, I would want to insure it under the Flood Re scheme. I know that the Association of British Insurers and the Government looked at whether businesses could be included within the Flood Re scheme, but found that it threw up more problems than it solved. This is best illustrated with an example.

I am a free range egg producer on my farm in Norfolk, and when it came to buying insurance for the business, I was presented with a long shopping list of types of cover relevant to my business: property; business interruption; loss of profits; contractors “all risks”; terrorism and malicious attack; livestock, including theft, worrying, death after straying, accidental or malicious death; deterioration of stock, in my case probably due to bad feed or electrical failure; perils and fatal injury; livestock in transit; disease, in my case probably something like bird flu or salmonella; goods in transit; motor, for lorries, trucks, vans or cars; employers’ liability; public liability; product liability or environmental liability; legal and professional expenses.

The list goes on, but I hope that gives your Lordships a flavour of the range of commercial insurance on offer. I, of course, had to cherry pick the cover that was most relevant to me. For instance, I did not buy livestock or goods in transit cover, because this is the responsibility of third parties with whom I have a contract. Also, I have no vehicles in that business, so motor insurance was not an issue. However, salmonella is an issue for my business, but because the insurance is so costly I chose not buy it. I hope that I got that one right. I have to choose not only the type of cover that I think is appropriate to my business but how much cover to buy for each category, the cost and the level of excess necessary to reduce that cost. The excess across my shopping list varies from £100 to £20,000.

Although there are hundreds of egg producers up and down the country with identical businesses to mine, I very much doubt that there is another that has commercial insurance exactly the same as mine. They will all be different, and that is the problem: all businesses, whether a corner shop, a pub, a guest house, a property investment company, a hotel or guest house, a manufacturing company or an engineering firm, will buy commercial insurance to suit their particular circumstances. The whole point of a mutual, whether Flood Re or one geared specifically to small businesses, is that the conditions are common to all. The price, the excess, the cover and the conditions must be standardised. This can be done for homeowner insurance—it is pretty bog-standard—but sadly, as I have tried to illustrate, not for commercial insurance. You just cannot standardise it. If it were standardised, virtually all commercial members of that mutual would end up with a policy that did not give them the cover that they wanted.

It would be good if everything could be included in Flood Re, whether owner-occupied houses, rented homes or small businesses, but the line must be drawn somewhere. It has been agreed that those with homeowner insurance, buildings and contents, will be included and that commercial insurance will not be. If I had a property in a flood-risk zone that was deemed to have commercial insurance with it and was therefore excluded from the mutual, I would ask my broker to split my insurance cover into two separate policies: one for the bog-standard homeowner cover, buildings and contents, to ensure inclusion within the Flood Re scheme, and the other to include all elements that made my cover commercial, such as owner’s liability or public liability cover. That might be a way forward for many of those finding themselves excluded from the Flood Re scheme because of the commercial element of their policy.

Flood Re will help up to 500,000 homeowners who cannot currently buy flood cover, but I am sure that with a little bit of inventiveness, many, although I am afraid not all, small businesses, including buy-to-let and leasehold properties, can buy their insurance in such a way as to be included in the scheme.

[Lord Whitty]

My Lords, my noble friend and I have two amendments in this rather complicated group. The group as a whole is beginning to get us into the area of who should be in and who is out of Flood Re, and we have some groups of amendments later that touch on the same issue. Before the Bill leaves this House, we must be clear who is in, who is out, and why.

My Amendment 160 would require the Secretary of State to report on the numbers of properties in flood-risk areas that were eligible, and those that were not, for inclusion in Flood Re. It would include looking at the specific exclusion as it stands of council tax band H and post-2009 new build. The report would look at how much it would cost to bring them in and who would bear the cost if they were brought into Flood Re, in terms of both premiums and the effect on the non-risky properties’ cross-subsidy.

We all have some sympathy with those groups that are excluded. However, we must be careful, as this is a delicate arithmetic deal between the Government and the ABI. I understand that negotiations were hard and long. As far as businesses are concerned, it is obvious that this must be addressed somehow. We have all seen the effects of flooding in recent weeks and the past few years, on small businesses and farms, on the Cockermouth high street a year ago and on the seafronts at Dawlish and Aberystwyth in recent weeks. We also know that the businesses that are hit—the shops, boarding houses and small businesses—are key to the prosperity of those local economies. It must be frustrating for small businesses, and those advocating their case, like the federation, because they were covered in some way under the statement of principles under the old scheme. However, the old scheme was a different sort of scheme. It was a deal struck by the ABI, agreeing that it would continue to cover—even then, it was not offering new cover—small businesses as well as households if the Government committed themselves to a certain level of expenditure on flood defence.

This is a different sort of deal; it is actuarially based. While we have all received representations on behalf of businesses, the approach now has a different basis. Even so, it is complicated. Some micro-businesses operated out of the owner’s house could be covered because they pay council tax rather than business tax. However, others will not. There are good reasons for this. The noble Earl, Lord Cathcart, described the bespoke way in which businesses negotiate their insurance as distinct from the more generalised way in which households are covered. It is difficult to see how businesses could be included in Flood Re as it stands without serious reconfiguration of the whole arithmetic. Therefore, while I have sympathy, I would not go so far as to press the Government on this front. However, I am in favour of knowing more about this. Therefore I support the proposition of the noble Lord, Lord Moynihan, that we look at this and report on it and see whether that might lead us to some other form of provision in parallel with Flood Re.

Some of the other boundary issues are even more complicated, particularly in relation to leasehold properties and the issue of whether landlords and tenants are included. The noble Earl, Lord Lytton, has dealt with one element of this and others are dealt with later on. Some of the government literature refers to leasehold properties. However, in general, the ABI and the Government do not think that leasehold properties are included. The situation with single landlords and tenants is not clear, although commercial providers of leasehold property are not included. The differentiation here is more the nature of the insurance than the nature of the property. While the property may be defined as being in risk or not, in a landlord/tenant situation, the tenant probably takes out the contents insurance, which is covered, whereas building insurance, which is the landlord’s responsibility, is not covered. That is quite a complex position, and it would also be true for multiple leasehold property. A future mortgage on such property is dependent to some extent, as the noble Earl, Lord Lytton, said, on there being ongoing insurance on the property. Leaseholders and the owners of the property may be faced with a double whammy if they are not careful.

As I said, I am not in favour of widening the group at this time because of the delicate arithmetic involved. We must address some of these issues in the Bill but for the moment I cannot support the amendments proposed by the noble Earl, Lord Lytton, nor the proposals of the noble Baroness, Lady Bakewell of Hardington Mandeville, on mixed hereditaments. I am not sure whether Amendment 160A in the name of the noble Lord, Lord Shipley, which would effectively delete the exclusion of post-2009 properties, is in this group. That is in a rather different category because people have been building in high-risk areas when they have known that they were going to be excluded under the old agreement, let alone the new one. I therefore have less sympathy for that group than I might have for the others.

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Moved by

[Lord Whitty]

156: Clause 51, page 107, line 21, at end insert—
“(8) Prior to making any regulations under subsection (5), the Secretary of State shall require the Committee on Climate Change to provide current and projected estimates of the number of properties that would be eligible for—
(a) inclusion in the Flood Reinsurance Scheme;(b) the value of levy required under section 53; and(c) the likelihood of additional levy or contributions being needed from time to time.”

[Lord Whitty]

My Lords, I shall also speak to Amendment 158. As we have discussed, actuarial calculations for the establishment of Flood Re have had to be pretty robust and tight, reflecting the level of risk assessed by the insurers and by the Government at this time, but we also all know that flood risk will change over time. We cannot, therefore, establish Flood Re on a totally static basis; it needs to be a dynamic process. The reality is that the numbers at high risk of flood damage are likely to increase, particularly, but not solely, because of the effects of climate change. The Committee on Climate Change and its Adaptation Sub-Committee are the key adviser to the Government on the numbers likely to be at risk of flood.

Over the next few years, Flood Re is supposed to operate in an area in which the Committee on Climate Change has already indicated there will be a significant increase in the numbers at significant risk of flood. The definition of “significant” in this context is one in 75 years. At the moment, that relates to about 370,000 properties. The information that Defra put into the basis of the impact assessment derived from the Committee on Climate Change statistics. I am not sure whether it is the database to which the noble Lord, Lord Krebs, referred or some other, but given that we are working on a 25-year timescale it said that this figure will have increased by the 2020s to between 475,000 and 825,000 and by the 2030s to between 525,000 and 1 million. That is a pretty big increase. By the end of the 2030s, the end of the 25-year period, it is potentially three times what we are talking about now.

Obviously, some mitigation will happen, but regrettably the level of flood defence expenditure fell—it is now rising again, but it fell—and the figures that have been used in these calculations show that there is a gap between the required expenditure and what is likely to be needed of about £500 million over the period of 20 years. That means that we have a significant problem in defining what is at risk in 10 or 20 years and therefore where Flood Re has to get to in terms of its financial arithmetic and the number of properties that it is going to cover. The Committee on Climate Change can advise on the likely change in crude numbers—indeed, it already has. It can apply probabilities to that, it can indicate what degree of mitigation, at what likely cost, is likely to offset this and it can look at the change in the nature of the risk and the areas to which it applies. It is important that both the Government and the administrator of Flood Re get strong, independent assessments of this changing and growing risk.

Indeed, this goes beyond climate change; there are the interrelationships between climate change, population growth, distribution of population, development pressures, water resource pressures, ecological consequences and so forth. The Committee on Climate Change and the Adaptation Sub-Committee are the authoritative bodies to do that and their role should be written into the Bill. My Amendment 156 does that and Amendment 158 would then require the Secretary of State to take notice of the advice from the Committee on Climate Change when setting targets under Clause 58 and more broadly. I beg to move.

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[Baroness Northover]

My Lords, I am grateful to the noble Lord, Lord Whitty, for drawing attention to his wish to ensure that that the policies set out in the legislation respond to the demands that climate change may bring in future—in particular, by including a formal role for the Committee on Climate Change. I was not entirely sure whether the noble Lord, Lord Krebs, accepted that formal role.

We fully agree that climate change and adaptation to it are vital. The noble Lord, Lord Whitty, added the additional factor of population growth. He rightly challenges us on the uncertainty of the future and we are very much aware of the need to plan for the future in this regard.

The Committee on Climate Change and, in this respect, its Adaptation Sub-Committee play a very important role in providing independent advice to the Government. The information and analysis provided since the committee’s inception have helped to shape the debate on climate change. Although the evidence of climate change is becoming increasingly compelling, it is clear that we need to do more to understand and plan for its impacts. This is a challenging task, given how interrelated and unpredictable those effects are. We have seen how variable the jet stream has been over the past few years, for example, and how it has brought us drought and flood.

Although, clearly, dealing with the current devastating flooding is the immediate absolute priority, we also need to reflect on our management of flood risk and assess our preparedness for climate change. The Government published the UK’s first national adaptation programme report in July 2013, which sets out the action that we propose to take. There is great expertise in this country, not least in your Lordships’ Chamber, which we can access and are accessing, as well as learning lessons from elsewhere.

Specifically in relation to Flood Re, I assure noble Lords that climate change projections were considered alongside other risk factors during the design of the policy and that the effects of climate change will continue to be considered during future levy-setting discussions. I remind your Lordships that in the memorandum of understanding with the industry that has been used to craft the Bill—I mentioned it in relation to a previous group—we have recognised the importance of the programme of flood defence and have committed to a specified amount of expenditure for 2015-16. However, we believe that advising on the scope and financial parameters for the transitional Flood Re scheme is a role for the insurance industry and would be outside the current remit of the Committee on Climate Change.

To clarify, the number of policies that would be eligible for Flood Re is based solely on the cost of the flood risk component of any policy, which is set by the insurers. This assessment of flood risk will indeed change over time, as the noble Lord, Lord Whitty, acknowledged, and it would not be possible for the Committee on Climate Change to provide any estimates without detailed knowledge of industry pricing models. Similarly, the value of the levy required and the likelihood of the need of any additional contribution by insurers is based on a number of financial parameters that could change year on year. Those include the level of premiums received, the cost of reinsurance and the amount of levy collected.

The Government and the Association of British Insurers have worked hard to determine the value of the levy required and the likelihood of the need for additional contributions, based on industry data and assumptions that were subject to independent review by Professor Stephen Diacon. In addition, extensive modelling, using a model that was quality-assured by the Government Actuary’s Department, has been carried out by the Government using there data, as part of both the pre-consultation and post-consultation impact assessments.

Looking forward, the Environment Agency will continue to collect and analyse data on flood risk, which will feed into the Government’s ongoing assessment of the scheme. In addition, as Flood Re is directly accountable to Parliament, detailed audited information about Flood Re’s ongoing operation will be reported to Parliament regularly.

I turn now to the proposed role of the Committee on Climate Change in advising the Secretary of State on setting the target number in relation to the flood insurance obligation. Clause 58 gives the Secretary of State the power periodically to set a target for the proportion of properties on a register of properties at greater flood risk that relevant insurers are collectively required to issue with insurance policies. The register, to be created by the Environment Agency and its counterparts in the devolved Administrations, will be based on the flood risk maps published by those bodies.

The number of properties indicated as subject to flood risk may change with time, as a consequence of climate change or through better information and mapping. The Secretary of State would set an overall target for the number of registered properties that the industry as a whole needs to cover. In setting this target, the Secretary of State would consider evidence on existing take-up rates of insurance and other relevant data. This could include advice from the Committee on Climate Change, should the Secretary of State wish.

The setting of the target number is a decision regarding the appropriate breadth of support that should be given by this financial support mechanism. Again, we believe that advising on the target number would be outside the committee’s current remit and, for reasons discussed in relation to Flood Re, would not be the most appropriate use of its resources or expertise.

Although, for the reasons that I have set out, we do not feel able to accept these specific amendments, I would like to return for a moment to the wider spirit behind them. We absolutely recognise that climate change is a most important consideration for the management of future flood risk and we value the expertise of the Committee on Climate Change. We are pleased that the independent Adaptation Sub-Committee will be publishing a revised climate change risk assessment report in summer 2016. We will consider that evidence and any implications for flood risk management carefully once the report is received.

Noble Lords know about various measures that we are putting in place to reduce the risks of flooding and coastal erosion, so I will not expand on that right now. I hope that the noble Lord will have been reassured by what I have had to say, setting what we are doing here in the context of our deep understanding of the potential implications of climate change and the unpredictability of measuring it into the future. I hope that he will withdraw the amendment.

[Lord Whitty]

My Lords, I thank the Minister, who clearly recognises the issue. I also thank the noble Lord, Lord Krebs, who, I thought, accepted the additional responsibility—although slightly conditionally. The conditionality was that the financial information, at least in broad terms, would be available to the committee.

I am a bit disappointed by the Minister’s reply. She recognises clearly the importance of climate change in defining the nature and scope of the problem. The Government have an authoritative independent committee available to them to feed into their deliberations, along with the administrator of Flood Re, but she is saying, “Actually, the Minister might or might not take notice of what the Climate Change Committee says, but, in any case, it is not the role of the Climate Change Committee and the Adaptation Sub-Committee to talk about financial risk assessment”. That is not what we are saying, though. To feed in to the risk assessment, you need the most authoritative input that you can get, in order that the financial structure can be changed to reflect those increased risks, changed probabilities or changed distribution of risk. I would have thought that it would be useful to the Government to have it written into the Bill that they have an authoritative input on this from the Committee on Climate Change.

In response to the noble Lord, Lord Ashton, I am not looking for this input before we get Flood Re off the ground. I will be looking for an ongoing input. The administrator of Flood Re, as well as the Government, is going to look increasingly for this kind of authoritative input. At the end of the day Flood Re is—despite its statutory base and its reporting to Parliament—a private body informed by the expertise of the insurance industry, but that expertise is itself informed by the best information that can be got on risk. In my view, the best information that can be got is probably from the noble Lord, Lord Krebs, and the noble Lord, Lord Deben, who is no longer in his place. I would have thought they would be the best and most authoritative sources to be relied on. I am surprised that they are not prepared to get that reflected in the Bill. For the moment, I withdraw my amendment.

Amendment 156 withdrawn.

--- Later in debate ---

[Lord Whitty]

My Lords, I broadly support most of these amendments, but I have a few queries. I support the first two amendments, Amendments 156C and 156D, unequivocally. It should be part of the role of Flood Re to help raise awareness, both among policyholders and in the community at large, and it will need to do so in conjunction with the Environment Agency, local authorities and so forth. However, clearly, the insurers also have a responsibility, as is reflected in these amendments. This will help both the beneficiaries and the insurers to move to a more systematic, cost-reflective basis for the whole system over time. It is also true that the administrator should be required to produce a plan for the operation of that scheme, as provided for in Amendment 156D. There must also be an overall longer-term plan for transition over the 25 years of the plan, as is proposed by the noble Lord, Lord Krebs, and the noble Baroness, Lady Parminter.

I am less sure that we should stipulate a five-year review period in legislation. In a sense, the scheme is always under review and will be changed in the light of new advice or new experience of flood conditions. Tying this down to every five years may not be the most sensible thing to do. Part of that assessment would be to indicate what measures would be needed to reduce long-term costs, as provided for in Amendment 156F. Insurers may encourage both individual and collective schemes of mitigation. As I have said before, this may involve mitigation by the policyholders, as a condition of that policy, or as a “cream-off” from compensation received in order to renew the policy. The noble Lord referred to Flood Re’s assessment of the need to invest in order to save in the longer term. I understand all of that. I am, however, a little worried by the term “subsidising”, which is included in Amendment 156E. I am not sure who is subsidising whom in this context. If the noble Lord means measures such as these, I think that is appropriate, but I would not use that term, as it might suggest a cross-subsidy over and above what is already provided for in the scheme.

Even after the noble Lord’s gallant attempt at explaining Amendment 156G, I do not follow it fully. As I understand it, the objective is to keep the levy cost down for those outside the scheme and the means would be some sort of quota-sharing agreement. I bow to the greater expertise of those involved in the insurance industry to tell me whether that will work. Subject to those queries and my slight lack of comprehension on the last amendment, the noble Lord, Lord Krebs, and the noble Baroness are in the right territory with these amendments.

[Lord De Mauley]

My Lords, I concur with the noble Lord, Lord Krebs, in Amendment 156C that it is important that householders whose policies are ceded to Flood Re are aware both of the flood risk in their vicinity and of the transitional nature of the scheme. Knowing about flood risk is vital so that households can take simple steps, such as signing up to free flood warnings, as well as investigating longer-term options for managing their flood risk, and can understand the likely impact on their future premiums of the withdrawal of the subsidy from which they are benefiting.

We will work with insurers and Flood Re to support people at flood risk to plan for and adjust to risk-based pricing. I hope that noble Lords will be reassured to know that we have agreed with the ABI that insurers will be required to provide information to customers about their flood risk, Flood Re and the actions that they can take to manage this, both when a property is ceded to Flood Re and at the point of a claim. Of course, raising awareness of flood risk remains primarily a matter for risk management authorities, such as the Environment Agency, so it will be important to ensure that any action by insurers on behalf of Flood Re complements their work.

Turning to Amendment 156D, I understand that by changing the phrasing of the power in Clause 54(3) from “may” to “shall”, the notion that Flood Re is a transitional measure is strengthened. I point to the Government’s stated policy objective in the June 2013 public consultation that,

“there should be a gradual transition towards more risk-reflective prices”,

and to the existing provisions in subsection (2) of the clause, which may require the administrator to have regard to the transitional nature of the scheme in discharging its functions. We have been clear that there should be a gradual transition to more risk-reflective prices and that we are committed to ensuring that the scheme retains incentives for flood risk to be managed. The Government will not designate the scheme until we are satisfied with the industry’s proposals. As I have already said today, the regulations designating the scheme will be subject to public consultation and we are currently considering the recommendation of the Delegated Powers Committee that regulations made under this clause should be subject to the affirmative procedure. While I recognise that the shift from a permissive power to a firm expectation could be claimed to underscore Flood Re’s duties in this regard, I believe that there is sufficient clarity in Flood Re’s role to manage the transition to risk-reflective pricing and for that to be achieved through the current drafting of the Bill.

Turning to Amendment 156E, from my noble friend Lady Parminter, I can confirm that it is, as she said, our firm intention that the policy will be reviewed every five years by the Government. This review will assess the level at which the levy and the eligibility thresholds are set to ensure that the policy objectives of Flood Re continue to be delivered, including the transition to risk-reflective pricing. The plan will be a public document and Parliament will be able to use existing powers to call Flood Re’s staff to answer any questions. On the point made by the noble Lord, Lord Whitty, in the case that Flood Re’s finances are out of kilter or the scheme is not operating effectively, that review will be brought forward. We are working with the ABI to define this process. The amount of the levy and the thresholds will be set out in secondary legislation. We intend those instruments to have a review period, always accepting that they might be reviewed early if circumstances require it. In addition, as I have just said, we are taking a power to make Flood Re’s responsible officer directly accountable to Parliament for the scheme’s value for money and for propriety and regularity. There are powers to require Flood Re’s audited accounts to be laid before Parliament and provided to the Comptroller and Auditor-General to examine and compare against Flood Re’s published transition plan.

I now turn to Amendment 156F, which would require the Flood Re scheme administrator to set out how it intends to manage the transition to risk-reflective pricing by investing in flood risk mitigation measures. Actions taken by households, communities, businesses and Government to reduce flood risk are the best and most cost-effective way to secure affordable insurance for households at risk of flooding in the long term, and I recognise the noble Lord’s intention to see this reflected in the Bill. As I said earlier, Flood Re will have a duty to have regard to the need both to act in the public interest and to ensure economy, efficiency and effectiveness in the discharge of its functions. It may well be that the Flood Re administrator decides in due course that investments of the sort that the noble Lord would like to see present an appropriate means of complying with these requirements where there is a clear case for doing so. Nothing in the Bill precludes this. However, we think that it is important for Flood Re to retain flexibility in the way that it discharges its public-interest duty and plans for transition, in order to ensure that it is in a position to balance these requirements against its core obligations as a reinsurer. Accordingly, we do not think that it would be appropriate to mandate Flood Re to subsidise flood risk mitigation measures.

Finally, Amendment 156G would limit the maximum proportion of the cost of a claim that an insurer could reclaim from the Flood Re scheme to a specific amount, as part of the Flood Re scheme’s management of transition to risk-reflective pricing. I understand that the intention is that this would restore an element of risk-reflective pricing to insurance policies in Flood Re. This could create a financial incentive for households and insurers to put in place the necessary measures to manage their flood risk. However, price is one, but not the only, signal to households for achieving that and our proposals for ensuring that households have the necessary information to make informed choices about managing their risk should also act to drive resilient behaviours. While superficially attractive, sharing an element of the risk between Flood Re and households would also have the effect of creating a more complex system to administer, thereby adding to the overall costs of the scheme. Having listened to what I have said, I hope that the noble Lord will be prepared to withdraw his amendment.

--- Later in debate ---

[Lord Campbell-Savours]

My Lords, there is an element of confusion both outside and inside this House as to where the words which define the exclusion of leaseholders are to be found. I understand that Defra put out a notice in which it excluded leaseholders, but can the Minister tell us where this provision is made? The public are confused. The assumption when anyone reads this Bill that freeholders are included will be interpreted by flat-owners who have purchased their freehold but manage their blocks through leasehold companies—companies which have been established to manage the freehold, owned by the residents who have 999-year leases—to mean that they are also included. They will assume that because they are freeholders they are included. My understanding from my reading, although, as I say, I have not found the authoritative piece of literature, is that they are not included. In other words, people out there who believe they are included—freeholders of blocks of flats; not corporate interests but individual share-of-freehold owners—will think that they are included when they are not. That needs to be sorted out.

I cannot understand why they are excluded. Indeed, I would argue that they are probably less of a risk to insurance companies, even though they may well live in buildings on flood plains, because very often you find blocks of flats where no one is living on the bottom floor at all and the first flat in the block is on the first floor, above the area at risk of being flooded. If I am correct in what I am saying, will the Minister tell us why share-of-freehold owners in blocks of flats are being excluded when, in fact, they are freeholders and when, as I say, people reading the Bill will presume that they are included?

[Lord Whitty]

My Lords, I think my noble friend Lord Campbell-Savours is going back to a point that I raised earlier—namely, that the Flood Re parts of the Bill may have been produced relatively late in the Commons. However, the dividing line between what is included in terms of property and what is not is not as clear as it should be. My noble friend has just identified a group for whom this issue is particularly confusing, but in any case the distinction is not in the text of the Bill. As I said earlier, there is slight confusion about the various bits of paper that Defra has produced on this matter, so we need clarity one way or the other as to which groups are included and which are not. We have heard various bits of clarification from the Minister today. I think that most of those should end up in the Bill before we finalise it and I look to the Government to come forward with amendments on Report or at Third Reading to make sure that the position is clear.

I am afraid that I confused the amendment of the noble Lord, Lord Shipley, in this group with an amendment in an earlier group and commented on it earlier. However, whereas I have great sympathy with a lot of the other excluded groups, I have virtually none with those who built on and developed land in high-risk areas after 2009 because it was already clear from the previous agreement between the Government and the ABI that new insurance would not be given for those developments. Like the noble Earl, Lord Cathcart, I do not think we should give those people leeway retrospectively. If we shift the deadline now, somebody will argue for a deadline at a later stage to allow yet more development in inappropriate places, and that will skew the insurance figures and the whole calculation behind Flood Re. Therefore, I do not support the noble Lord on this occasion.

[Lord De Mauley]

My Lords, my noble friend’s Amendment 160A seeks to make all houses built and occupied before its introduction eligible for Flood Re. This amendment would move the cut-off date for inclusion of properties in the scheme to the start of Flood Re, rather than from 2009, and would also bring band H households in scope of the scheme.

I apologise to noble Lords as I suspect that I may be repeating what I said earlier today and, indeed, we may repeat it yet again later. First, I reiterate why we intend that properties built before 1 January 2009 and those in council tax band H and the equivalents would not be eligible for the scheme. However, before I do that, I shall respond to my noble friend Lord Shipley and a number of other noble Lords who asked what state the property must have been in at 1 January 2009 in order to qualify. It must have been in possession of a council tax band, which would imply that it was habitable at that date. I hope that is helpful.

The 2009 cut-off date recognises that new housing development should be located to avoid flood risk, or where development in a flood risk area is necessary, it should be designed to be safe, appropriately resilient to flooding and not increase flood risk elsewhere, in line with the national planning policies in place. This date therefore reflects the fact that homes built since 2009 should already be insurable at affordable prices. As the noble Lord, Lord Whitty, said, that marker has been in operation for several years, and it has been maintained under the Flood Re proposals.

The noble Lord, Lord Shipley, asked about surface water mapping. The new mapping has shown that the total number of properties affected by surface water flooding is lower than previously thought.

Band H properties are not included in the scheme because, as I explained in some detail earlier today, Flood Re is designed to target support to those who need it most.

The noble Lord, Lord Campbell-Savours, raised the issue of leasehold properties. As we have discussed, commercial policies are out of scope of Flood Re, which is designed to support households. We believe that this approach is fair and practical, and it was supported in the public consultation. However, the leasehold sector presents a more complex situation, where the contents policy is classified as domestic, but a buildings policy could be classified as either commercial or domestic and could cover multiple dwellings. As I said, I recognise the strength of feeling on this issue, particularly in light of the ongoing extreme weather conditions, and I feel we need to take time to consider it in more detail, although, without evidence of market failure, it would be difficult to justify action. However, we will examine the evidence further with the ABI and I hope to provide an update on Report.