Business Irish

Friday 23 March 2018

Flood victims left 'high and dry' by State and insurers

FBD chief executive Fiona Muldoon will have been pleased to see the insurer’s share price barely drop from €6.85 to €6.78 in the last week, despite the floods. You see, insurance companies in Ireland are allowed to decide not to provide flood insurance where there have been prior claims
FBD chief executive Fiona Muldoon will have been pleased to see the insurer’s share price barely drop from €6.85 to €6.78 in the last week, despite the floods. You see, insurance companies in Ireland are allowed to decide not to provide flood insurance where there have been prior claims
Richard Curran

Richard Curran

Being left "high and dry" might seem like an odd phrase to describe thousands of homeowners in the West of Ireland suffering from the awful consequences of Storm Desmond flooding. But that is exactly what has happened to them, given that many faced the same pre-Christmas nightmare just six years ago.

The Government has promised a €15m fund for businesses - meanwhile, homeowners are presumably supposed to rely on their insurance. In reality, many of them who were flooded in 2009 were denied insurance cover this time round and are now facing serious financial difficulty.

The problem is that in the intervening six years since the last big flood, in many of the same areas, very little has happened.

A flood like this should cost insurance companies millions. The storms at the start of 2014 cost FBD €36m. But this time around, most of the damage is due to flooding, rather than other kinds of storm damage.

Insurance companies in Ireland have simply been allowed to decide not to provide flood insurance where there has been a claim before. That may be why FBD's share price barely dropped from €6.85 to €6.78 in the last week. These floods will cost insurers -but they can recoup losses through higher premiums, just as they have done in the motor market.

The Government has let people down by not acting with sufficient urgency or resources to provide flood protection. It has also done nothing to address the problems of insurance for flooding. These are the two areas where government action could have made a huge difference.

Storm Desmond hit towns in Cork, Limerick and right up to Mayo and Donegal, pretty hard. If anything, the situation was worse in Britain, where flood damage in Cumbria alone is likely to cost £500m (€690m).

In the UK, under the terms of a deal between government and insurance companies, insurers must continue to provide flood damage insurance. The deal is flawed because there is no upper limit on how much. Some companies quote £2,000 (€2,750) per year for insurance. But it was intended as a temporary solution. Around 350,000 homes are prone to flooding.

The British government is introducing a new scheme called Flood Re, which will come into effect next April.

Under the scheme, insurers must provide a quote and cannot charge above certain reasonable and affordable caps for home insurance in flood-risk areas.

The portion of the insurance policy apportioned to flood damage goes into a separate re-insurance vehicle. This vehicle, however, is mainly funded by a £10.50 charge on every home insurance policy in the country. In effect, everybody will pay something to subsidise the insurance costs to those in flood-risk areas.

It is not a perfect solution - but it does have merit. Here in Ireland, everybody pays an insurance levy to fund the losses of Quinn Insurance, estimated at around €1bn in total.

Helping vulnerable people in the West of Ireland sounds like a much better use of an insurance levy.

Unfortunately for the UK, introduction of the Flood Re scheme has been dogged with political problems. Large mansions in Berkshire owned by millionaires will benefit from the scheme - while thousands of rented apartments will not be included.

Houses built after 2009 will not be covered either, so as not to reward excessive building on flood plains.

Last week, Tanaiste Joan Burton said that an insurance scheme of some kind was being considered here. It takes years to get it agreed and passed into law. In Britain, the industry back in 2011 formally recommended Flood Re as a long-term flood-insurance solution. It was agreed in 2013 with the government - but still isn't up and running.

If it takes off next year, it will have been five years in the making. But in Ireland we have had six years since the last major floods in these counties - and we are still not even on the starting blocks when it comes to a viable long-term insurance solution.

Government gets another good report to ignore

Taoiseach Enda Kenny's beaming smile jumps out of the opening pages of the National Competitiveness Council's (NCC) latest report. In his introduction, Kenny sums up the achievements of his Government and then thanks the council for its "input" into policy.

He mustn't have read the report, because it warns very clearly that "we are at risk of repeating past mistakes unless decisive action is now taken."

The report goes on to make a number of very sensible recommendations, some of which appear to be at odds with Government policy. With a general election looming, there is no chance that these policy ideas will be acted upon.

For example, the report calls for further broadening of the tax base. Yet, in the last Budget, Michael Noonan took a further chunk of workers out of the income tax net, bringing the number to 856,000, or 39pc of the income tax base, according to the report, although some of those pay USC and PRSI.

The NCC wants to see more money collected through property tax. There is no government policy moving in that direction and don't expect it in any manifestos.

The council wants to see a site-value tax introduced for property and land that is zoned and serviced for development. This would replace commercial rates and the vacant site levy.

Elsewhere, it wants to see the anomalies between PAYE and self-employed in the tax system removed. Giving the self-employed the full PAYE tax credit would cost €470m per year, not to mention abolishing the additional USC charge on self-employed earnings over €100,000 and PRSI anomalies.

It is hard to see any of the parties in the heat of an election providing over half-a-billion euro in lower taxes for entrepreneurs which would have to be covered by others.

In his introduction, Enda Kenny points to the Government's promises on infrastructural and capital expenditure.

The NCC points out that we are spending just 2pc of GDP on capital expenditure this year. Portugal, Austria, the Netherlands and Finland, all of which have lower GDP per person than us, are spending 2.3pc, 2.9pc, 3.5pc and 4.1pc respectively.

And finally, the council recommends the establishment of a new national pension reserve fund to cover future pension requirements. Good idea, except the old one hasn't fully gone away, you know.

After being raided to bail out the banks, it still has over €7bn in liquid assets and a further €15bn tied up in bank investments. The problem is, none of the money is being earmarked for future pension provision.

A bit like the Fiscal Advisory Council, politicians are getting solid advice - only to ignore it.

Eir takes on the big boys with Setanta deal

The newly named Eir really is taking on the big boys when it comes to TV and broadband. The company's acquisition of Setanta Sports Channel Ireland for a reputed €20m is a strong addition to its offering. It has live Premiership games, Uefa Champions League, European rugby and lots more. It is the biggest acquisition by the old Eircom company since it bought Meteor.

The pluses in the deal are the strong content and the marketing value it gives Eir. The company is also offering a so-called quad play of TV, broadband, phone and mobile.

But it won't be plain sailing in this cut-throat market. Its sports content was negotiated by Setanta at a price. How much will the much bigger Eir be forced to pay to retain it, once current contracts expire? Securing it all at the right price won't be easy for the new owners.

The other challenge is the sheer scale of its rivals in this area. Liberty Global, owner of UPC (now Virgin Media), has a market value of €31bn. Sky plc is worth €25bn. These are very deep pockets.

Eir has grown its TV customers numbers to 43,000, albeit at heavy introductory price discounts. Offering the Setanta content should allow it to increase customer numbers significantly and deliver some price increases that will stick.

It is a good deal by Eir as it carries benefits with very little real risk. But it probably won't be a 'game changer'.

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