The High Cost of Being Underinsured in an Emergency

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Northern Britain has been hammered by torrential rain and gale force winds, which have left homes and business without power and forced thousands to evacuate their homes. Three major storms in a month has highlighted the importance of home emergency insurance, as well as the short-comings of emergency insurance for small businesses, most of which are severely underinsured.

Mohammed Khan from PwC suggested the current storms have triggered more non-insured losses when compared to total economic damage. Small businesses contend that the costs of emergency insurance are prohibitively high, coming in at around £20,000 per year with excess of £10,000.

However, as the recent floods have shown the most expensive emergency insurance is still far cheaper than not having cover in the event of floods. Too many small and family-run businesses have lost everything during the latest storm cycles that hit the UK and they will continue to lose as their doors remain closed while repairs are carried out and new stock purchased.

There have been calls for the government to come up with an affordable solution – and they did. Unfortunately, Flood Re only launches in April, so businesses that have waited and hoped for the best have been horribly affected.

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It never rains but it pours

According to the Environment Agency, December was one of the worst periods of extreme weather conditions and flooding for the UK – and it’s not over with weather forecasts predicting heavy rain through Wednesday. Public Service Announcements warning of continued heavy rains and severe flooding will keep the British public aware of the risks and of any changes in the situation.

In many of the flood-hit communities the spirit of camaraderie and good neighbourliness has shone despite the dark clouds, with some business owners describing the “people power as amazing” as help pours in from volunteers.

Emergency services have been deployed in many towns of the flood-ravaged regions – helicopters dropped sandbags in Tadcaster, North Yorkshire when an old stone bridge crumbled into the river. Cumbria and Yorkshire are expected to experience further flooding. Severe flood warnings remain in place, the danger to human life is of major concern to officials and emergency workers.

A fortnight ago river levels in northern England reached record highs, and around 6,700 properties were flooded. Businesses of Hebden Bridge have been hard hit by severe weather patterns since 2012, and on Boxing Day 2015 the town was flooded with 5ft. of heavy rain, a 2ft. increase in water levels from the flooding in 2012.

To make matters worse, many independent businesses that had insurance and claimed for damages after the 2012 storms were unable to get emergency insurance again.

Conservative estimates of the flood damage are around £3 billion, but according to KPMG, the cost of the damage is closer to £6 billion. This estimate is based on the immediate and longer term impact to households, businesses and insurers.

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Justin Balcombe, KPMG’s head of general insurance management consulting, said that similar flooding during 2007 generated a total of £3.2 billion in claims, but that the financial impact was in fact far greater. He went on to suggest that December’s flooding would impact the economy with a total between £5 billion and £5.8 billion in losses. This is a far wider scope of economic damage than estimated by PwC, which calculated that a total of insurance claims from the December’s damage would come in at around £1.5 billion.Importantly, KPMG’s calculation includes households and businesses that will be forced to shoulder additional damage costs due to inadequate disaster insurance cover. These costs are estimated at around £1 billion. Additional costs include local authority costs for rebuilding the communities and the cost of loss of market share which yield a combined value of around £850 million. The company also factors in costs for flood defence repairs and replacement, higher insurance costs on renewal and a shake up to the insurance industry which combined yield a value of around £2.5 billion.

To make matters gloomier there are widespread concerns that the devastating floods could seriously hinder economic growth. According to Howard Archer, chief economist at IHS Global Insight, the recent floods could shave 0.2 – 0.3% off GDP growth overall in the quarter with issues like businesses not being able to open, loss of agricultural output, people not being able to get to the shops, travel and also the cost to the insurance companies. Archer anticipates the impact to be spread between the fourth quarter of 2015 and the first quarter of 2016. However, there is a silver lining because the repair work which will be carried out during the first quarter of 2016 may well result in an economic boost.