The Government’s £200m cuts on flood defences could have a catastrophic effect on the commercial property market by making flood insurance unavailable. This warning came today from Bill Gloyn, partner, European real estate of broker Jardine Lloyd Thompson Limited, chairman of the BPF insurance committee and immediate past-president of the City Property Association. He was speaking at an event on the implications of the comprehensive spending review (CSR) on flood risks in London organised by the British Property Federation and the City Property Association and hosted by law firm Lawrence Graham.

Gloyn explained that insurance against flood damage is critical to a whole range of contracts in the real estate business – construction contracts, leases and funding agreements. Although cover is currently available in the UK, the Statement of Principles agreed between the Association of British Insurers (ABI) and the Government in 2008 stipulates that the Government must maintain and improve the country’s flood defences. Now, says Gloyn, that deal and the continuity of flood insurance is in doubt because of the spending cuts announced in October.

The consequences could be very serious, he said. “If cover is not available – and that is already the case in some areas of the UK – the consequences are almost too catastrophic to contemplate. The widespread breaches of contract could lead to chaos and a potential collapse of the property market – both commercial and residential.”

Gloyn warned: “Anyone thinking that the insurance market would not withdraw cover on a widespread rather than selective scale only needs to remember that there is clear precedent for that to happen. It did for terrorism – first, for fire and explosion, following the City of London bombs of the early 1990s and did again, for all cover, following the atrocities of 9/11.”

Figures published by the ABI on 24 November 2010 showed that since 2000 insurers have paid claims of £4.5 billion to customers whose homes or businesses have been hit by flooding. This is up 200% on the £1.5 billion paid in the previous decade in real terms. Major losses included the 2007 summer flooding which resulted in insurers paying out £3 billion, the 2005 floods in Carlisle that cost £272 million, and the Cumbrian floods in November 2009 costing £174 million. According to the ABI, reasons for the rise in flood costs include the increased frequency and severity of flooding in the UK and the growing problem of surface water flooding – about which not enough is yet known.

Gloyn added that the latest valuation guidelines from the Royal Institution of Chartered Surveyors (RICS) make it clear that, seemingly for the first time, flood and other sustainability risks must be taken into account. “It would be an unwise valuer who didn't also consider if insurance was available before settling on a value. It is worth recalling the response given by the Council of Mortgage Lenders to the Pitt Review following the summer 2007 floods – in summary, without insurance there is no mortgage. Without mortgages, there is no property market.”

"We had a clear message from the insurance market this morning, through David Williams, managing director of claims for Axa Insurance, that flood insurance will not continue in its current form when the Statement of Principles comes to an end in 2013. This means that the premium subsidy that properties at higher risk now receive will end. It will give insurers an opportunity to encourage domestic and commercial property owners to improve the resilience of their buildings and sites by reducing the cost of insurance to reflect the reduced risk. As brokers, we will use our skills to negotiate rates that really do take account of improvements that owners make."

Gloyn welcomed remarks by Anne McIntosh MP, chairman of the House of Commons Defra select committee, that flood protection is a high priority for the Government and that, although planned spending on flood defences had been reduced, the money has been actually allocated. He called for more research on surface water flooding by the Government, the Environmental Agency and the insurance industry.

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