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The economics of flood insurance
The economics of flood insurance

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1.3 Flooding in the UK

Flooding has always been a feature of life in the UK. But particularly severe episodes, for example, in 1947, 1953 and 2000, have played a major part in the development of its approach to flood risk management. For example, in 1953, a combination of a high spring tide and severe windstorms caused a 5.6 metre rise in sea levels which left 1,600 kilometres of the eastern coastline from Scotland to Kent damaged, 40,000 people homeless and 307 people dead (Landmark Information Group, 2014; Tregaskis, 2013). It triggered a focus of flood management on engineering projects to keep the water out.

Further, though less severe, flooding incidents over the following 20 years caused damage in both agricultural and urban areas and mortgage lenders began to insist that the homes they lent against be covered by flood insurance. Rather than separate flood cover, this was bundled into home buildings policies that cover a wide range of other risks too, such as fire, subsidence, break-in and so on. During this period, while still focusing on physical defences, there was a shift towards protecting urban areas and a noticeable example was the start of construction on the Thames Barrier.

However, public confidence in the government’s approach, already waning, was shaken by severe floods in the year 2000, which triggered a shift towards a ‘making space for water’ strategy and growing unrest in the insurance industry (which you will look at in detail in Section 4).

Activity 3 Who stands to lose from flood risk and flooding?

Timing: Allow 10 minutes for this activity

Suggest which sectors within an economy might be adversely affected and how by a flood and flood-risk.

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The main sectors that might be impacted include:

  • Households. This includes homeowners and renters who may be directly affected by damage to their homes and disruption to their everyday lives in the event of flooding. Homeowners who are not flooded may still be affected indirectly if their flood insurance premiums increase.
  • Businesses. Direct impacts included damage to buildings and stock and loss of income due to business disruption in the event of flood and higher insurance premiums for businesses located in flood-risk areas.
  • Government. The public expect the government to be in control if there is a major flood. It is responsible for relief work and ensuring safety and clean up. It may have to provide welfare support if families are left with no home. Flood events draw public attention to the government’s flood management and there may be increased scrutiny and calls for better flood defences in the wake of a flooding episode.
  • Insurance companies. They provide homeowners and businesses with cover against the financial consequences of flooding. If insurer have correctly assessed risk and have the funds to pay out claims for flood damage, the impact of a flood may be ‘business as usual’, but if the incidence and scale of flooding increases, insurers will want to raise the premiums they charge.
  • Wider community. There may also be wider impacts. For example, flooding affects infrastructure, such as transport and power supplies causing disruption beyond just the flood area. In a general sense, all UK taxpayers contribute to government efforts to manage the risk of flooding and respond when it happens, so they are impacted as well.