The Government and the insurance industry have reached a stalemate over striking a deal to provide universal cover when the existing deal expires this summer.
In evidence to a powerful committee of MPs, Redruth-based flood and fire recovery specialist Richfords has suggested ministers set up an "insurer of last resort".
The idea, backed by George Eustice MP, who serves on the environment select committee, suggests that a levy on all buildings insurance policies is used to create a "reinsurer mutual" – a company which provides cover for insurance companies. Known as Flood Re Mutual, the central fund would provide a safety net so insurance companies will cover at-risk properties. As a mutual, assets and profits could be used to invest in flood defences, assistance for families hit by floods or reducing the levy.
The idea emerged as MPs are about to debate the future of cheap insurance in the Commons on Tuesday, and Environment Secretary Owen Paterson faces a select committee grilling on the issue.
Mr Eustice, Conservative MP for Camborne and Redruth, raised the Richfords idea at a select committee hearing last week. He said: "The insurance industry has been trying to dump risk on the taxpayer by asking the Government to stand behind them as an 'insurer of last resort' but I don't think this can be justified.
"The whole purpose of the insurance industry is to protect and manage risk, so why do they need the Government to bail them out?
"The proposal from Richfords is interesting because it deals with the problem of providing cover for homes at high risk of flooding by establishing a pool system and a mutual fund, but it would be organised and financed by the industry and would not need any Government support.
"I hope that ministers will look closely at alternative proposals like this."
Under the so-called "statement of principles", the insurance industry has a deal with the Government whereby it agrees to provide affordable insurance for those in high flood risk areas. In return, ministers have to put forward enough funding for defences to reasonably avert the risk of flood.
The existing deal ends in June, but the insurance industry has been alarmed that the Government has made cuts to flood defence spending to help tackle the deficit. To ease their fears, insurers want the Government to provide a temporary overdraft facility, to be paid back in full, to underwrite claims for 200,000 high-risk households in the event of serious flooding, such as those seen in 2007. If the "statement of principles" expires, households at risk of flooding – many more than just the 200,000 high-risk properties – would be at the mercy of the free market, with many facing premiums that are prohibitively high or even not being able to secure insurance at all.
The Westcountry peninsula is vulnerable to flooding due to its long coastlines and steep valleys, underlined by brutal flash floods in Devon and Cornwall in recent months.
Steven Richford, owner of Richfords, said: "Many of our customers, who we have helped recover from flooding, are becoming increasingly concerned that their homes could become worthless and unsaleable if the 'statement of principles' lapses.
"Without insurance on the building, most people will be unable to mortgage their property, adding to the housing shortage."
