Flooding economic impact will breach £5bn

Flooding economic impact will breach £5bn

KPMG is working with organisations across the North as they respond to the current flooding and has also quantified the financial impact of the damage.

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KPMG is working with organisations across the North as they respond to the current flooding. One of the firm’s roles is assisting in quantifying the financial impact of the damage.

Justin Balcombe, KPMG’s UK head of general insurance management consulting, says:

“The scale of the flooding over the last few weeks has seen communities across large sections of Northern England, Wales, Scotland and Ireland severely impacted. In 2007 when a similar pattern of flooding hit, total insured claims were £3.2bn, however, we consider that the actual financial impact far exceeded this. We are assessing this month’s events through a number of economic lenses, resulting in an initial total cost estimate of £5bn-£5.8bn.”

Insured losses £1-£1.5bn

Estimated cost of claims to be made by insured homeowners and businesses.

Under Insurance £1bn

The limits on many insurance policies mean they are inadequate for covering the full loss.

This is driven in part by homeowners still feeling the effects of the recession and reducing insurance premium spend and coverage.

In addition, given the post Christmas timing, homeowners will have indirectly increased their contents values through with presents and food, and while several policies provide for such an uplift, many do not.

Furthermore, businesses that have been impacted by flooding may take longer to return to pre loss profitability while their insurance coverage may not extend beyond a notional 12 month business interruption period.

Justin Balcombe added: “We believe that there is a serious level of under insurance and would estimate this economic impact to be as significant as the insured event, to the tune of an additional £1bn.”

Local authorities and infrastructure costs £0.5bn-0.75bn

Some of the cost to local authorities for the expense of returning communities to normal, will be covered by insurance. But the scale of the flooding and the level of infrastructure damage, including knock on affects and claims to public transport, utility companies and social services suggests the government will be required to provide additional funding. This excludes any further investment into reinforcing flood defences.

Business loss funding gap £50m-£100m

“Grey areas" of business coverage such as loss of attraction and market value are not typically covered by insurers and therefore represent significant costs that businesses must absorb as they work to recover.

We anticipate calls for the government to step in and fund this gap, assisting rural communities and those on low income without insurance, to rebuild communities and lives.

Therefore KPMG’s economic estimate at this stage is £2.55bn £3.3bn.

There will be considerable additional costs looking ahead.

Flood defence £2bn

This represents the cost of repairing and replacing flood defences, the impact on next year’s insurance premiums in renewal, inflation and exceptional costs, based on prior year’s spend and parliamentary recommendations.

Resulting in a longer term economic impact £4.55bn-£5.3bn.

Change to insurance industry business model £0.5bn

KPMG predicts that insurers and their supply chains will be required to rethink their business models and products.

Some of the cost of this change will be passed on through an increase in premiums and risk transfer to Flood Re and other reinsurers. However insurers will initially stand the business change costs through internal investment in IT, skills and process improvement.

The result is a total estimate of impact cost due to flooding of £5-5.8bn to the UK’s insurance sector, businesses, individuals, communities and government.


For media enquiries, please contact:

Alison Anderson, KPMG Press Office

T: +44 (0)113 254 2980

E: alison.anderson@kpmg.co.uk

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KPMG Press Office: +44 (0)207 694 8773

About KPMG

KPMG LLP, a UK limited liability partnership, operates from 22 offices across the UK with approximately 12,000 partners and staff. The UK firm recorded a turnover of £1.9 billion in the year ended September 2014. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. It operates in 155 countries and has 162,000 professionals working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.

This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.

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