Flooding a threat to UK housing sector recovery

London: Doubts about insurance cover for flood-prone homes risk undermining the housing market recovery, lenders warn.

The Council of Mortgage Lenders has urged ministers and insurers to find a solution to a problem that threatens to leave about 200,000 households without flood cover.

Insurers have agreed to provide the cover to most homes, on condition that the government undertakes to invest in improving flood defences. But the industry does not plan to renew the arrangement when it expires in June 2013.

Given that households tend to take out the policies annually, the CML warned that the availability and cost of insurance could become more uncertain within weeks.

The council has written to Richard Benyon, environment secretary, warning of the consequences if ministers and insurers fail to hammer out a fresh deal.

"All potential buyers may be deterred by flooding risk," the CML said. "An increase in the number of homes that cannot be insured may add to the problems of a property market in which there is already a reduced number of transactions."

It added: "Without a clear lead from the government, it may be difficult to ensure that flooding insurance is widely available, at a reasonable cost." The Association of British Insurers has warned that the existing arrangement with the government is "untenable".

The commitment by incumbents to provide cover to high-risk properties gives new market entrants an unfair competitive advantage, it argues.

Marsh, the insurance broker, has suggested setting up a new "risk pool" of more than 20 million homes to dilute the risks of providing the cover.

But Otto Thoresen, ABI director-general, said he was against this proposal, as it would require extensive government support and relied on the international re-insurance market.

Both the ABI and the environment department said they were working together to find a solution.

But the department added: "Any targeting of government funding needs to be feasible, offer value for money and endure over the long term."

— Financial Times