A few weeks ago I travelled to the Lake District for a couple of days on a working visit. Whilst there I heard some hearbreaking stories of the devastating effects of the flooding on businesses in the area which may well have an impact more profound and long lasting than the awful flooding of homes. According to a recent Office for National Statistics (ONS) business population estimate over 400,000 micro businesses are based in the North West of England. But larger businesses are also affected. A biscuit factory in Carlisle and an interior furnishings business in Lancaster were flooded. Some of the businesses have gone forever leaving their owners penniless. In 2007, when a similar pattern of flooding hit, total insured claims were £3.2bn. As this Guardian newspaper article points out, in 2009 it was estimated that infrastructure repair alone following the flooding that year would cost £376 million. Towns like Cockermouth took literally years to fully rebuild. It is worse this time with accountants KPMG predicting that the total cost of the floods in December 2015 would exceed £5bn, with about £1bn falling to families and businesses with no or inadequate insurance. Although my direct experience is of the Lake District, the same problems occur in other flooded areas such as Yorkshire.
So what about business insurance? Many policies will not provide cover beyond a 12 month notional business interruption period. But some premises are seriously damaged and will take months to dry out and repair before the owners can even think about moving equipment and production in again. By the time custom is rebuilt to levels of profitability this can take them well beyond the 12 month limit. There is another group of businesses which are physically unaffected by flooding but are still being forced into bankruptcy. This is because the vast majority of business insurance policies do not cover ‘loss of attraction’ or ‘market value’, affecting businesses hit by the destruction of infrastructure. The A591 road, for example, suffered severe damage along some sections and is taking months to rebuild. With road bridges also suffering damage, traffic flows have been completely disrupted meaning for some businesses passing traffic has ceased altogether. It is estimated that one way or another about 20% of businesses have been affected by the extreme weather.
It is interesting to examine Government rhetoric and the extent to which it departs, once again, from reality. Research published by the Financial Conduct Authority (FCA) in May 2015 found that smaller firms were disproportionately dissatisfied with their insurance payout in previous flooding episodes.But the problem of insurance for these businesses is not insurmountable as the The Flood Reinsurance (Flood Re) Scheme demonstrates. After long of delays the Government-backed a scheme to provide affordable home insurance for about half a million people with homes in high flood-risk areas which will finally come into force in April this year. Under the scheme the Government will help fund that part of the policy concerned with flooding. But the Government specifically excluded small businesses! A Department for Environment, Food & Rural Affairs (DEFRA) statement claimed:
We recognise the difficult challenges that some small businesses could face in areas of high flood risk. However, we remain of the view that overall there is insufficient evidence to justify government intervention in the provision of insurance cover for small businesses.
Incredibly, this also extended to charities and co=operatives as you can see on Page 4 of this DEFRA document.So much for support for Cameron’s Big Society!
DEFRA accepted that there was a flood risk and decided to take NO action! So here we have the hypocrisy of a Government which is clearly bankrolled by big business. Economically the only point of saving the Banks in 2008 was as a temporary measure to safeguard jobs and homes while we set about a long-term rebuild of the whole financial system which was clearly not fit for purpose (and which has not happened). Apart from a question of scale there is no difference in the Lake District where state support is desperately needed to safeguard jobs and families in a fragile economic system. Particularly galling is that many owners implicitly criticized by KPMG could not afford more expensive insurance policies as they were still recovering from the deep recession caused by the reckless greed of that same banking system
The experience of the Lakes illustrates the situation in the UK where vast amounts of money are given to big business but small businesses which could be saved at a fraction of the cost go to the wall. These are not businesses which are struggling with long term profitability causing a continued drain on the public purse but businesses which have been hit by a natural disaster. The Government continually bombards us with the ‘hard working people’ and ‘small businesses are the backbone of the economy’ phrases which one again can be clearly seen as empty rhetoric.