Crichton 2006

Climate Change and its effects on small businesses in the UK: Technical Report. By David Crichton

Foreword to archive edition

This report was commissioned by AXA Insurance in 2006 and originally published by them on 13th September 2006. I am indebted to AXA for their assistance with the supply of data and advice and for their permission to republish the report here. The statistics shown were correct as at 2006, but will obviously have changed since then, especially with the changes in the UK economy caused by the recession. However the basic issues have not changed and if anything, the challenges to small and medium enterprises are now even greater. This is particularly so in England where the most recent floods have occurred. For example:

The floods in June 2007 produced 185,000 claims in Carlisle, Doncaster, Hull, Sheffield, and Yorkshire.

A month later, flooding in Gloucestershire, Oxfordshire, and Worcestershire cost insurers £3bn after the wettest summer in England since records began.

The next year, 995 properties in the centre of Morpeth flooded in 2008, leading to an average 70 per cent increase in insurance premiums.

In November 2009, 314mm of rain fell in only 24 hours in Cumbria, a new record for England, causing flooding in Braithwaite, Cockermouth, Workington, Kendal, and Keswick, with 36,000 flood claims.

Each of these floods were concentrated in the centres of towns and villages. Many were made worse by the failure to clean watercourses and the cessation of dredging riverbeds due to EU Directives. Thus 60 per cent of the claims from the 2009 floods were from businesses, mainly SMEs.

To add to the problems of SMEs, market commitments to provide flood insurance, first made in 1961, are due to expire in 2013 and this could lead to many more problems of availability and affordability of insurance cover.

By contrast, Scotland has been very active in reducing flood risk and there are now at least 40 ways in which the flood risk is significantly lower in Scotland than in England, despite higher rainfall levels.

David Crichton

Inchture, December 2011.

Important notice

This publication is intended to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that neither the author nor the publisher is thereby engaged in rendering a specific legal or any other professional service. While every effort has been made to ensure the accuracy and completeness of the publication, no warranty or fitness is provided or implied, and the author and publisher shall accept neither liability nor responsibility to any person or entity with respect to any loss or damage arising from its use. This paper reflects the personal views of the author.

Fair Use Notice: The material in this document is provided for educational and information purposes. It may contain copyrighted material the use of which may not have always been specifically authorised by the copyright owner for this publication. It is being made available in an effort to advance the understanding of scientific, environmental, economic, social justice and human rights issues etc. It is believed that this constitutes a 'fair use' of any such copyrighted material as provided for in section 107 of the US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material in this document is distributed without profit to those who have an interest in using the included information for research and educational purposes. If you wish to use copyrighted material from this document for purposes of your own that go beyond 'fair use', you must obtain permission from the copyright owner.

Allegations and anecdotes given by flood survivors and others in focus groups, survey responses or elsewhere are reproduced only to illustrate examples of opinions, memories and perceptions held within the communities studied. Publication of these comments or other research findings does not necessarily imply agreement by the author or the publishers with any statements made or opinions expressed. The author and the research companies concerned reserve the right to strictly respect the anonymity of persons making comments under the protection of the Chatham House Rule of the Royal Institute for International Affairs.

This report may be cited as: Crichton, D., September 2006. Climate Change and its effects on small businesses in the UK: Technical Report.” AXA Insurance, London.

Foreword

This report concentrates on the effects of insurance changes and climate change on small and medium enterprises (SMEs) in Britain, the first time this topic has been addressed. It is an important one: SMEs are arguably the backbone of the UK economy, in terms of diversity, innovation and social cohesion, but they are also the most vulnerable section of the UK economy to climate change impacts. AXA is the second largest insurer of SMEs and the leading property insurer for small businesses in the UK.

Climate change has already impacted dramatically on British business, and as insurers, we have seen the average cost of business interruption soar, with costs having risen by almost 60% in just 4 years to £35,000, a sum which has a potentially devastating impact on SMEs.

This report shows that the already high costs borne by SMEs as a result of climate change (most clearly manifested in flooding) are set to rise dramatically. Projected scenarios detailed in this report, using modelling data from the Government, show that the cost is likely to rise in 3 the order of 30 or 40 times by 2080. This would mean that flooding would cost the UK economy up to £42 billion, every year, in today’s prices.

Attempts to mitigate greenhouse gases will result in higher energy costs and fuel poverty issues. But climate change impacts are also going to be costly for everyone in terms of not just property damage, but business interruption (as shown above) and impacts on future employment. These costs will particularly affect the poor, the elderly, and single parent families, often the very people most likely to live in flood risk areas where land is cheaper. The effects on society are hard to quantify but should not be underestimated. Repeated suffering on the part of this “underclass” of vulnerable people could open a gulf which could lead to a breakdown of social cohesion.

Despite their vulnerability to the impacts of climate change, SMEs are yet to take the threat posed by climate change seriously enough, and it is imperative that government and the insurance industry work in partnership to ensure that business is adequately prepared and supported. Our research, which is outlined in detail later in this report, shows that some 90% of businesses are currently under-insured and 70% of businesses in high risk areas are not concerned that flooding will affect them.

Small businesses such as the corner shop and the local builder help to cement this social cohesion, but they have to contend with competition from big companies as well as climate change impacts. As our surveys have shown, small businesses get little help from the authorities when it comes to flooding, either in terms of flood warnings or assistance in recovery. They get the most help from their insurance companies. Perhaps this report may help to persuade others that small businesses form an important sector of our society which is particularly vulnerable to the challenges which climate change will bring.

A condensed version of this report has been published for policymakers (ISBN 978-0-9554-0- 2)

About the research A condensed version of this report was published for policymakers in September 2006, along with a risk management booklet for small businesses. This is the technical report which covers the subject in more detail.

The research for this study was conducted in July and August 2006 and consisted of the following elements:  Analysis of insurance claims data supplied by Axa and the National Flood Insurance Claims Database.  A telephone survey of small businesses in flood hazard areas (see appendix 1)  Focus Groups in Carlisle and Elgin (see appendix 2)

In this report, 1 billion = 1,000 million.

The study has been confined to flooding, and further limited to flooding in England and Scotland simply because those are the parts of the UK with the most recent widespread floods affecting large numbers of SMEs, not because Wales or N. Ireland are immune from flooding as residents in Trefriw and Llanrwst will no doubt confirm, after serious flooding there in 2004 and again in 2005.

There are of course many other impacts of climate change, such as heat wave, drought, changing storm tracks, mould, subsidence, insect infestation, and diseases etc. These are important topics for SMEs and some consideration of these is included in a separate new guidebook produced by AXA written for SMEs to help them to manage their risks. 4

Executive Summary

The threat of climate change has taken on a new urgency during the last 12 months following the discovery last December of a 30% reduction in the thermohaline ocean circulation (which drives the Gulf Stream) and increased melting in the Greenland ice cap. New research reports are increasingly discussing “dangerous” climate change and so called “tipping points”. A tipping point is a point of no return where feedback effects start to accelerate change resulting in an escalation of global warming, or sea level rise. This summer there were predictions from mainstream scientists in a new OECD report1 that global sea levels could rise by as much as a metre in the next 100 years. The graphic below outlines potential global mean sea level rise from the IPCC (Intergovernmental Panel on Climate Change).

IPCC estimates of global mean sea-level rise

This is the first research to look specifically at the impact of climate change and insurance on small and medium enterprises (SMEs) in the UK. It concentrates on flood risks, although climate change will produce many other threats for small businesses. It is based on insurance data from AXA Insurance, a major insurer of SMEs, combined with a survey of small businesses in recently flooded areas and comments from focus groups of the managers and owners of small companies which have survived recent major floods.

Part A of the study gives an overview of climate change and SMEs. The potential effect on SMEs of increasing flood damage and reducing insurance availability could be serious for the economy as a whole, but our survey shows that while 85% of businesses are aware that climate change is a problem for the world:

 46% of small businesses think that climate change is blown out of proportion and  only 26% think it is a real threat to them

1 Robert J. Nicholls, Susan E. Hanson, Jason A. Lowe, David A. Vaughan, Tim Lenton, Andrey Ganopolski, Richard S.J. Tol, and Athanasios T. Vafeidis. 25th June 2006. “Improving methodologies to assess the benefits of policies to address sea-level rise.” report to the OECD 5

The Small Business Council’s Annual Report for 2005 barely mentions climate change as an issue2, despite government concern on the subject, but suggests it is something to look at in the future.

This has to change: there are many things that SMEs can do to adapt to climate change impacts and to mitigate carbon emissions. The insurance industry must do much more to help and AXA Insurance has already published guidance on business continuity planning for small businesses.

The findings from our surveys give little comfort: UK small businesses seem to show little awareness or concern for climate change or its impacts. Insurers have their own “tipping point”. If firm action is not taken soon, insurance could become unsustainable in many parts of the UK where the flood hazard is growing rapidly. The potential effect on small businesses of increasing flood damage and reducing insurance availability could be catastrophic for the economy as a whole.

Our survey shows

 Small businesses seem to be missing out. Most assistance is going to domestic households.  Few small businesses receive flood warnings or help from the local council.  The survey indicates that the most help for small businesses came from their insurance companies.

How helpful or otherwise was each of the following when your

business was affected by a severe weather event? 66%

44% 39% 38%

27%

12%

Insurance Emergency Local utility Local council Environment Central company services company Agency/ SEPA Government

Part B of the study quotes from the government’s own research under the UK Climate Impacts Programme and the Foresight programme and applies it to SMEs. It points out that government research shows if nothing is done then within the lifetimes of our children or grandchildren flood damage economic costs could average between £5.5 billion and £42

2 Small Business Council 2006. “Giving small business a voice” Annual Report for 2005. 68pp Small Business Council, London.

6 billion every year. It would not take many bad flood years in a row, for England to face economic meltdown.

Part C looks at some of the ways insurers could help and some of the work already done by insurers to help in Scotland. where for the last ten years, detailed insurance advice has been requested by almost every local council and has been given freely and regularly in face to face meetings with council staff on land use planning, sustainable drainage and sustainable flood management measures.

In most of Scotland there is now virtually no new building in floodplains and flood problems are being tackled urgently. This is reflected by the attitudes of a number of insurers which treat risks more sympathetically in council areas where insurance advice is followed. Where advice is not followed, insurance availability can potentially become a problem. The Elgin case study examined in this report is a good example.

England is a much bigger problem: insurance advice to individual local authorities has not been requested by more than a handful of English councils. Local authority planners in many areas in England, often under pressure to meet central government targets, are still allowing new development in floodplains. The disastrous floods in Carlisle (which cost AXA Insurance alone some £24.5m in insurance claims) are also the subject of a special study in this report.

This report concludes that if government are not prepared to listen more to the message from insurers, the industry may have to take more extreme action. The report calls for the government to work with the insurance industry to seek solutions.

SMEs and especially small businesses are vitally important in terms of the economy, social inclusion, local employment, innovation, and the local character of our communities. The research conducted for AXA Insurance will help to identify where the problems lie and what more the insurance industry can do.

 Insurers have their own “tipping point”. If firm action is not taken soon by government, insurance could become unsustainable in many parts of the UK where the flood hazard is growing rapidly.  Insurers are experts at dealing with risk. They know how to control it and reduce it, yet many research reports ignore the major contribution insurers can make and are already making.

The insurance industry needs to move up a gear to face this challenge. A good place to start is with small businesses which are vitally important in terms of the economy, social inclusion, local employment, and the local character of our communities.

About the author David Crichton is a Fellow of the Chartered Insurance Institute and the author of the Institute’s “Flood Fact File” and several books and papers on climate change. Trained as an economist, he has 25 years experience in insurance underwriting and claims handling. For the last ten years he has specialised in climate change impacts on insurers and is a visiting professor at the Benfield Hazard Research Centre at University College London, a visiting professor at the Middlesex University Flood Hazard Research Centre and an Honorary Research Fellow at the University of Dundee. He has advised the UN, NATO, OECD and governments and insurers in four continents on flooding and climate change issues. This report represents his personal views.

The author is grateful to AXA Insurance for their assistance and to all who responded to the surveys for this report, especially to those who took the time to come to the focus groups and talk about their experiences.

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Introduction

The scope of this report is limited to projected flooding impacts from climate change, particularly on small businesses. Attempts are made to quantify the future economic costs but also to describe the other costs faced by small businesses and to highlight their importance to society in terms of social inclusion and cohesiveness issues. There are many other direct and indirect impacts from climate change, such as windstorm, drought, subsidence, and freeze. These are described in a separate risk management guide written for SMEs which is available from AXA Insurance and are considered in more detail in a separate technical report which will be available shortly from the AXA Insurance web site.

This report is divided into three parts.

 Part A looks at the current problems in areas which have flooded,  Part B attempts to assess the future scale of the problems on a national basis, and  Part C asks the question “What can the insurance industry do to help SMEs and society cope with climate change”.

Insurers are very conscious that they might be accused of “scaremongering” or over- exaggerating problems. Perhaps this is why many of them have been relatively reticent until now about climate change impacts. After all, it is argued, society has successfully dealt with previous scare stories about the ozone hole, acid rain, and pesticides, why not with climate change? Our survey showed for example that 46% of small businesses thought that the threat of climate change has been blown out of proportion and only 26% see it as a real threat to their own business.

But climate change is different. It is not something that can be reversed by banning CFCs or stopping burning coal in cities or banning the use of certain pesticides. Professor Sir David King, the UK’s Chief Scientific Advisor has stated3 “In my view, climate change is the most severe problem we are facing today – more serious even than that of terrorism” .

Society is still too dependent on the burning of fossil fuels and as the vast emerging economies of China and India seek their share of economic growth, time is running out for the planet. Insurance is the biggest industry on the Earth and is the one which will suffer first from severe weather due to climate change.

The projections in this report are limited to those published in official research papers by reputable mainstream scientists. They are dramatic. The insurance industry has a duty to express its concerns about the implications. It may upset some vested interests, but at the end of the day, the biggest question is: - what sort of legacy are we going to leave for our grandchildren?

It is now perhaps time to mobilise the risk management skills of the insurance industry as a whole and its power to use market forces to help society to deal with the impacts of climate change in the UK. This report sets out to show why and how.

3 King, D A, 2004. - “Climate Change Science: Adapt, mitigate or ignore” Science, Vol 303, January 2004.

Part A: The problem

European summer high temperatures could be normal by 2040s, relatively cool by 2060s

If you thought summer 2006 was hot, by 2100 it could be much hotter even if emissions are controlled to a medium emissions scenario. Source: Met Office Hadley Centre ******************************************************

“In my view, climate change is the most severe problem we are facing today – more serious even than that of terrorism” - Professor Sir David King, the UK‟s Chief Scientific Advisor4

The heatwaves and power cuts of summer 2006 are a reminder that the climate is changing. However this research has found that many small businesses are not really interested in climate change, and some still do not actually believe it is happening. “I just think things go in cycles, the climate just goes in cycles … I don‟t think its global warming…”

It is a fact, however that in most parts of the UK, 30 to 40% of new small businesses do not survive for more than three years, and 8% do not survive for more than a year5.

The projected changes in the climate are not small. Within Europe, the rate of climate change equates to the climate moving North at a rate of 6 miles each year6. Fish and birds can keep pace with this and there are increasing reports of sightings of species in the UK and its waters which are strangers to these shores. However habitats, plants, trees, buildings and infrastructure cannot move so easily.

4 King, D A, 2004. - “Climate Change Science: Adapt, mitigate or ignore” Science, Vol 303, January 2004. 5 DTI Small Business Service Statistics, February 2006. 6 Nordic Council, 2005. “Conservation of Nordic Nature in a changing climate” 9

There is worse to come. The 1992 United Nations Framework Convention on Climate Change introduced the term “dangerous climate change.” Dangerous climate change is likely to happen very rapidly in climate terms when certain thresholds or “tipping points” are passed7. For human society two of the most important impacts of tipping points are rising sea levels and possible changes to the Atlantic Thermohaline Circulation which produces the Gulf Stream. For example, Greenland and Antarctic ice sheets are already moving towards the sea many times faster than just ten years ago and if catastrophic melting of these ice sheets occurs sea levels could rise by more than a metre this century.

IPCC estimates of global mean sea-level rise

This shows projections from the Intergovernmental Panel on Climate Change for global mean sea level rise under different emissions scenarios. Source IPCC. ********************************************************

Extensive research has been carried out on these issues, particularly sea level rise. One recent international report8 for the OECD contains a special section on the Thames Gateway development in London, where it identifies impacts based on “…2 million people threatened with a rapidly increasing flood risk without a response, even allowing for expected upgrades….” This report also highlights the vulnerability of much of London‟s financial sector including Canary Wharf.

7 Benfield Hazard Research Centre, 2006. “Dangerous Climate Change: rising sea levels and ocean circulation changes.” Benfield Hazard Research Centre, UCL, Technical Report Number 05 8 Robert J. Nicholls, Susan E. Hanson, Jason A. Lowe, David A. Vaughan, Tim Lenton, Andrey Ganopolski, Richard S.J. Tol, and Athanasios T. Vafeidis. 25th June 2006. “Improving methodologies to assess the benefits of policies to address sea-level rise.” report to the OECD 145 pages. Produced by researchers from the Tyndall Centre for Climate Change Research, University of Southampton, British Antarctic Survey, Hadley Centre, University of East Anglia, Potsdam Institute Germany, Hamburg University, Vrije University Amsterdam, Carnegie Mellon University, USA, University of the Aegean, Greece. 10

Planning for Flood Risk Management in the Thames Estuary THE STUDY AREA SHOWING AREA AT RISK FROM TIDAL FLOODING

ANGLIAN REGION

CANVEY ISLAND BENFLEET THAMES REGION BARRIER BARKING BARRIER FOBBING HORSE BARRIER Barking/Havering SHOEBURYNESS Stratford/Royals Shellhaven/Canvey Island Greenwich Peninsula EAST HAVEN BARRIER Grays Thurrock Woolwich/Erith Tilbury Lewisham Isle Of Grain SHEERNESS

Kent/Thameside Gravesend THAMES BARRIER Medway Sheerness/Sheppy

DARTFORD BARRIER

TEDDINGTON WEIR SOUTHERN REGION (TIDAL LIMIT)

KEY GLA Boundary 5m Contour Downstream Limit of Strategy EA Regional Boundary Zone Of Change

The dark blue area shows the natural tidal flood plain. If it were not for the defences this area would flood twice a day. Source: Environment Agency. ************************************************

Globally, if sea levels rise by one metre there will be 410 million people living less than 5 metres above high tide level. Latest estimates based on the 5 metre contour are that 3 million people in Britain are threatened directly by predicted sea level rise9. (In the Netherlands the figure is 10 million.) Within 200 years, London, Edinburgh, Scunthorpe, Bristol, Norwich, Newcastle, Bournemouth, Peterborough could all be under water10. Sea level rise and more storms in the south of England are already changing the shape of the coastline due to coastal erosion. By 2080, the number of people at risk of flooding in Britain11 will increase from 1.6 million to between 2.3 and 3.6 million. The risk of river or coastal flood could increase between two and 20 times.

Being a maritime climate, the UK is subject to severe and prolonged rainfall events which can cause flooding and such rainfall events are predicted to become more likely.

9 Robert J. Nicholls, Susan E. Hanson, Jason A. Lowe, David A. Vaughan, Tim Lenton, Andrey Ganopolski, Richard S.J. Tol, and Athanasios T. Vafeidis. 25th June 2006. “Improving methodologies to assess the benefits of policies to address sea-level rise.” report to the OECD 145 pages. Produced by researchers from the Tyndall Centre for Climate Change Research, University of Southampton, British Antarctic Survey, Hadley Centre, University of East Anglia, Potsdam Institute Germany, Hamburg University, Vrije University Amsterdam, Carnegie Mellon University, USA, University of the Aegean, Greece. 10 Benfield Hazard Research Centre, UCL, 2006. “Dangerous Climate Change: rising sea levels and ocean circulation changes.” Technical Report 05. UCL London. 11 For details see http://www.foresight.gov.uk/fcd.html 11

Probability of change in England & Wales rainfall

Note the reduction in mean summer rainfall does not mean summer floods will not happen. Summer could still produce heavy rainfall events, and if the ground is dry the rainfall run off would be faster. Source: Met Office Hadley Centre

**** The Boscastle flood in August 2004 was the result of a prolonged stationary thunderstorm caused by the remnants of Hurricane Alex, which had picked up vast amounts of water from the Atlantic on its way towards the UK. This resulted in 130mm (6 inches) of torrential rain in six hours (the monthly average is 70mm to 90mm) and cost the insurance industry some £15m.

Winter storms could increase by up to 25 per cent in the UK as a result of climate change, according to a report12 by WWF. This shows that Britain could be hit by 10 extra severe storms - similar on scale to the Great Storm of 1987 - over a 30-year period between 2071 and 2100, if carbon emissions continue to rise unchecked. Top wind speeds are likely to increase by 8-16 per cent and the worsening winter weather would bring with it major damage and financial losses.

The research for this report looked particularly at the effects of flooding on small businesses in Carlisle and Elgin.

Carlisle The flooding in Carlisle in January 2005 was caused by a storm which was described as a “weather bomb” by the Met Office. A wind speed of 128mph was recorded causing damage to houses as well as widespread power cuts. More than half a million trees across the county were blown down, and flooding occurred in many parts of the

12 Leckebusch, G., and Tin, T., 2006. “Stormy Europe; the power sector and extreme weather.” WWF-World Wide Fund for Nature, Gland, Switzerland 12

Lake District as well as Carlisle. 90% of schools in the county were closed because of flooding, storm damage, or lack of electricity. In the past, such severe storms were usually confined to Scotland. The UK Climate Impacts Programme Scenarios published in 2002 (UKCIP 2002) gave a snapshot of future climate13 for the 2020s, 2050s and 2080s. UKCIP02 discusses changes in the north south pressure gradient which may result in stronger winds in southern and central Britain. It suggests a possible shift southwards of storm tracks which may result in stronger winter winds moving from Scotland to England and France where buildings are generally less resilient and more easily damaged. Good examples of this happened with the storms of 1987, 1990, and 1999, as well as 2005. Alain Joly, director of research at the French national meteorological research centre warned14 in 2004 of a 50% increase in the number and severity of storms in France by 2080. In 2006, the Met Office published figures showing a reducing number of “gale days” since 1957 in Scotland15 but it warns that there is no clear trend as yet.

Indeed a common theme in the focus groups was the concern over the fact that much of the flooding came not from rivers but from the drains and sewers, and was usually polluted with sewage and worse. “…So like I said it wasn‟t the river that actually flooded us it was the drains … everything had backed up and I mean if it had just been river water it would have just dried up but because it was the drains and the sewage everything was contaminated- that was one of the biggest problems.”

The Ten Geese “I am surprised we have not had any real major health problems there is nobody really gone down with anything with the amount of cr** that was in that water especially with the sewerage, diesel, oil, arsenic you name it. We had at least 10 geese they died due to what was in the water.”

13 Hassell, J M; Boorman, D; Mcdonald, R And Hill, S.,2002. “Climate Change Scenarios for the United Kingdom: The UKCIP02 Scientific Report.” Tyndall Centre for Climate Change Research, School of Environmental Sciences, University of East Anglia, Norwich, UK, 120 pp.

14 Speaking at a joint international conference organised by the Association Française pour la Prévention des Catastrophes Naturelles (AFPCN) and the UK Advisory Committee on Natural Disaster Reduction (ACNDR) the respective national platforms for the United Nations International Strategy for Disaster Reduction, (UN/ISDR). This conference was held in Government buildings near the National Assembly in Paris on the 22nd and 23rd September 2004. 15 Barnett, C. Hossell, J., Perry, M., Procter, C., and Hughes, G., 2006. “A handbook of climate trends across Scotland” SNIFFER project CC03, Scotland and Northern Ireland Forum for Environmental Research, 62pp. Scottish Executive, Edinburgh. 13

Elgin Between 1956 and 1997, Elgin has had eight major flood events, all occurring in July or August and due to summer thunderstorms. However the most recent floods have occurred in April 2000 and November 2002. It is interesting to speculate on why floods are starting to happen there at different times of the year. There is no reason to suppose that summer floods will not continue, but if autumn and spring floods are now starting to happen too, this could well be due to climate change. The annual average number of days with heavy rain in Scotland16 has increased by 8.3 since 1961, mainly in the north and west of Scotland. Between 1961 and 2004, there has been an increase of nearly 70% in winter precipitation in North Scotland. Scotland has a whole has become 21.1% wetter since 1961, although summer precipitation has reduced.

Again as rainfall levels increase it will be important that drains and watercourses are cleaned regularly to prevent flooding. In Scotland there is now a statutory duty on local authorities to do this17.

Some insurance companies are beginning to take advantage of the Scottish legal system to sue local authorities for failure to maintain drains and watercourses, and if insurers could only be persuaded to resort to such litigation more often and more aggressively it might “encourage” councils to take firmer action to reduce the risk. Already most Scottish councils are now very diligent in cleaning their drainage systems. However, in the Scottish study area of Elgin the council do not seem to have cleaned drains and watercourses regularly for many years. “…I think it‟s more to do with the fact that they haven‟t cleaned culverts since I was a bairn.”

Psychological Impacts It is not widely recognised that local small businesses often bear the brunt of the psychological impacts of flooding because not only are they repairing their own property, they are in the front line in helping to repair the homes of flood survivors. “Yes, we were working day and night; it was quite stressful to be working in some of the people's houses - they'd be coming round every day, crying, their bairns … they were heartbroken. Most of them never went back to their houses.”

The furniture shop “…There was one lady that really sticks out in my mind. She got moved from her house, which was flooded. She went into flat number 2 and she came in and chose her furniture. A couple of days later I had a lady come in and she chose some furniture and told me where she lived…. I got there and I moved almost identical stuff again, into flat number 2 and the lady who had been in there had died. Now I think it was the stress of the flood. And it gets worse. Same thing happened again the next week. I delivered virtually about the same stuff into flat number 2. That lady had then

16 Barnett, C. Hossell, J., Perry, M., Procter, C., and Hughes, G., 2006. “A handbook of climate trends across Scotland” SNIFFER project CC03, Scotland and Northern Ireland Forum for Environmental Research, 62pp. Scottish Executive, Edinburgh. 17 Flood Prevention and Land Drainage (Scotland) Act 1997. 14 died. They were all flood victims. And that is why I really hope something is going to get done soon because it does take its toll on the likes of the elderly.

The older people are, the harder it is to deal with and I don‟t like seeing… I really am hoping something is done because the human factor… Not the money factor. A lot of people did benefit greatly, but I don‟t want to benefit from someone else‟s suffering.”

There is still a long way to go. A recent report18 from the International Institute for Environment and Development, stated:

“…How cities and the enterprises and households they concentrate are planned and governed over the next few decades will have major implications for future emissions and the risks they bring. …” “Urban centres also concentrate many of the people most at risk from the direct and indirect effects of climate change. City governments have the potential to reduce this risk. Concentrating people and businesses lowers the cost per person for most measures – for instance providing defences against floods, building spare capacity into water supply systems – and adapting urban infrastructure to cope with extreme weather events and sea level rise. But in the real world these potentials are not used, since local and national governments lack the capacity or choose not to invest in this.”

This was demonstrated in August 2006, when defra announced cuts in flood defence expenditure less than a month after the insurance industry had requested substantial increases in flood defence expenditure. It is perhaps now time that the insurance industry realised that increased spending on flood defences is not the only or the best answer.

The importance of SMEs to the UK economy19 SMEs are “Small and Medium sized Enterprises”. There were an estimated 4.3 million business enterprises in the UK at the start of 2005 with an estimated turnover of £2,400 billion Of those, only 1.2m had employees, employing 22m people.

Almost all of these enterprises (99.3 per cent) were small (0 to 49 employees). Only 27,000 (0.6 per cent) were medium-sized (50 to 249 employees) and 6,000 (0.1 per cent) were large (250 or more employees).  3.1m businesses, mainly in the construction industry, are sole traders with no employees.  SMEs together account for more than half of the employment (58.7 per cent) and turnover (51.1 per cent) in the UK.  Small businesses alone (0 to 49 employees) accounted for 46.8 per cent of employment and 36.4 per cent of turnover.

SMEs are therefore critically important to the UK economy.

18 International Institute for Environment and Development, 2006. “2005 annual report.” IIED, London. Available from www.iied.org

19 Department of Trade and Industry, August 2006. “Small and Medium-sized Enterprise (SME) Statistics for the UK 2005”

The number of SMEs overall is growing. In the 11 years from 1995 to the end of 2005, the number of SMEs registered for VAT has increased by 265,000.

The main growth areas for SMEs have been in the construction industry, leisure industries such as restaurants, bars and catering, also in newer growth industries such as internet retail, post and courier services, Real estate and property letting has also seen growth.

What is happening? And what does the future hold?

SMEs are the main drivers of job creation, innovation, diversity, and growth in the UK economy. They are also arguably the most vulnerable to impacts from climate change, terrorism and taxation.

 More than 30% of small businesses are unable to survive the first three years of operation20, and in London the figure rises to 35%.

The Small Business Council which was set up as a Non-Departmental Public Body to report to the Secretary of State for Trade and Industry on the needs of existing and potential small businesses is certainly well aware of problems. in its latest annual report21 makes no fewer than 32 recommendations for Government. The Council say

 “We are also concerned at the impossibility of obtaining business insurance in the event of certain man-made or natural disasters. The Council urges the Government to consult the business community in order to explore the viability of establishing some form of emergency fund to assist businesses (to) recover from uninsurable events.”

This report has not identified the need for an emergency fund. The insurance industry has the capacity to help businesses and people to recover from flood and storm events without any charge on the taxpayer. But the situation is clearly becoming more serious.. What the insurance industry should have is a “seat at the table” for experienced and qualified insurance experts who understand the problems.

What are these “uninsurable events?”

 The Insurance industry is increasingly seeing flooding, in a growing number of high risk areas, as uninsurable.  In the last 6 years, weather damage claims have cost the UK insurance industry over £9 billion. Of this, £2.3 billion has been caused by claims from businesses, with a further £300m due to business interruption caused by weather damage22.  Within Europe, the rate of climate change equates to the climate moving North at a rate of 6 miles each year23.  3 million people in Britain are now threatened directly by predicted sea level rise,24 according to an OECD report. The report mentions that some concerns “over

20 DTI Small Business Service, February 2006. 21 Small Business Council June 2006. “Giving small business a voice” Annual Report for 2005. 68pp Small Business Council, London. 22 Association of British Insurers statistics bulletin. 23 Nordic Council, 2005. “Conservation of Nordic Nature in a changing climate” 16

possible misuse (of the report) to raise public anxiety were raised particularly regarding the insurance industry” This is a typical response from vested interests which would prefer insurers to keep quiet about the problems.  Within 200 years, London, Edinburgh, Scunthorpe, Bristol, Norwich, Newcastle, Bournemouth, Peterborough could all be under water25 as sea levels rise.

Why is this happening? And why are we hearing about it now?

It is all a question of “tipping points”.

1. We are reaching a tipping point with climate change. Greenhouse gas emissions are now so high that soon “dangerous” climate change will be irreversible. Feedback mechanisms in the climate will accelerate the changes. This is already being seen with the melting of the Greenland ice sheets and sea level rise. A recent Scottish Executive report26 on sea level rise, contains an ambitious target for an urgent programme of coastal flood defence construction to be completed by 2008. 2. Scientists say average global temperatures have varied by less than one degree since the dawn of human civilisation, but now they predict a global rise of between 1.40C and 5.80C by the year 2100. The so called “hockey stick” graph (see below) shows that temperatures are now growing so steeply that the heatwaves of 2003 and 2006 will soon be the norm. In the UK, 2003 was the hottest summer since records began; 2006 was the second hottest. 3. 2006 has also seen a “tipping point” within the mass media, where there has been an almost Damascene change. Sir David Attenborough, (voted “the most trusted celebrity in Britain”) was quoted in The Independent, on 24th May 2006 as saying:

“I am no longer sceptical.

Now I do not have any doubt at all.

I think climate change is the major challenge facing the world.”

Public awareness is also increasing, and will continue to do so, helped by the award winning film “An Inconvenient Truth” which went on general release in September 2006, and which seems set to be one of the most successful documentary films in recent years.

4. Another “tipping point” relates specifically to the availability of flood insurance in the UK. Continuing floodplain development in England without a corresponding investment in flood management means that since January 2006, the insurance industry no longer guarantees to be able to quote for flood cover in high risk flood areas, not only in England, but anywhere in the UK27. (Even though flood risks are being responsibly managed in most of Scotland, Wales and N. Ireland.) For the time being, insurers will usually maintain cover for loyal existing policyholders, but where

24 Robert J. Nicholls, Susan E. Hanson, Jason A. Lowe, David A. Vaughan, Tim Lenton, Andrey Ganopolski, Richard S.J. Tol, and Athanasios T. Vafeidis. 25th June 2006. “Improving methodologies to assess the benefits of policies to address sea-level rise.” report to the OECD 145 pages. Produced by researchers from the Tyndall Centre for Climate Change Research, University of Southampton, British Antarctic Survey, Hadley Centre, University of East Anglia, Potsdam Institute Germany, Hamburg University, Vrije University Amsterdam, Carnegie Mellon University, USA, University of the Aegean, Greece. 25 Benfield Hazard Research Centre, UCL, 2006. “Dangerous Climate Change: rising sea levels and ocean circulation changes.” Technical Report 05. UCL London. 26 Scottish Executive, 2005. “Seas the opportunity – a strategy for the long term sustainability of Scotland‟s coasts and seas” 27 , the ABI statement of principles on the provision of flood insurance was issued on 11 November 2005 17

the flood hazard is high, ever increasing levels of premium are being charged by the market with excesses that can be as high as £20,000. 5. We are also reaching a “tipping point” within the global insurance industry. Insurers have concluded that they can no longer accept a back seat in the debate. They will have to not only take part, but become leading players, using their expertise in risk management and catastrophe modelling. After all, insurers are the biggest industry in the world and often in the front line when dealing with the effects of natural disasters. 6. The government itself will be instrumental in forcing insurers to take action, not only by continuing to allow building in the floodplain in England, but at the same time its insurance regulator is requiring higher standards of solvency requirements on insurers based on risk exposures28 in preparation for the EU Solvency II Framework Directive due to be adopted in 2007. 7. The European Commission’s proposed Directive on the assessment and management of flood risk in Europe29 was published on 18 January 2006 and will require new flood maps and risk assessments to be produced. France and Germany are already working on their maps and plan to make it illegal to build in flood hazard areas.

The “Hockey Stick” Graph

28 Financial Services Authority (FSA), 2006. “Integrated Prudential Sourcebook” FSA London. Paragraph 1.2.22R requires that “… a firm must at all times maintain overall financial resources…to ensure that there is no significant risk that its liabilities cannot be met as they fall due.” Insurers are to identify and understand the risks in their business, identify an appropriate control environment to manage those risks and monitor the enforcement of the controls. 29 “Proposal for a Directive of the European Parliament and of The Council on the assessment and management of floods” {SEC(2006) 66} (presented by the Commission) Brussels, 18.01.2006 COM(2006) 15 final 2006/0005(COD)

The “hockey stick” graph. Millennial Northern Hemisphere (NH) temperature reconstruction (blue – tree rings, corals, ice cores, historical records) and instrumental data (red) from AD 1000 to 1999. A smoother version (black), and two standard error limits (grey) are shown. Source: IPCC Third Assessment Report

In June this year, two very significant statements were issued from different sections of the insurance industry:

 “… the sheer magnitude of climate change could in future impact a large number of industries to such an extent that sustainable insurability may ultimately be put into question.” - Chief Risk Officers of 14 of the biggest insurers30.  “…We don‟t know exactly what impact climate change will have. But we do know that it presents society and the economy with an increasing level of uncertainty as it seeks to manage its risk. We believe that it is time for the insurance industry to take a more leading role in understanding and managing the impact of climate change.” – Lloyds of London31

Are small businesses equally aware of the impacts of climate change?

To discover the answers to this AXA commissioned a new survey of 400 owners or directors of small businesses (less than 50 employees) in areas recently devastated by flooding (Carlisle, Boscastle, Lewes, Hawick, Thirsk, Elgin, Selby and Chichester.) The survey selected 100 business which had been directly affected by flooding and 300 which had not. The businesses predominantly had fewer than 4 employees and two thirds of the respondents were male.

30 Markus Aichinger, Allianz, Eberhard Faust, Munich Re, JeanNoël Guye, AXA, Pamela Heck, Swiss Re, Annabelle Hett, Swiss Re, Peter Höppe, Munich Re, Ivo Menzinger, Swiss Re, Ernst Rauch, Munich Re, Samuel Scherling, Swiss Re, Martin Weymann, Swiss Re, June 2006. Climate Change & Tropical Cyclones in the North Atlantic, Caribbean and Gulf of Mexico. Emerging Risk Initiative – Position Paper. CRO Forum, Geneva.

31 360 Degree Risk Project 2006. “Climate change; adapt or bust” Lloyds of London, With the assistance of: Acclimatise., Insurance Information Institute, New York, Lighthill Risk Network, London., Lloyd’s Market Association, London. June 2006.

AXA also commissioned focus groups in two of the areas most recently affected, Carlisle and Elgin. Some of the focus group comments are quoted throughout this report.

 AXA’s survey (see below) showed that while 85% of small businesses see climate change as a problem for the world, most small businesses do not see climate change as a real threat to their own business and many are underinsured or not insured at all.  We already know from insurance claims experience (see below) that small businesses can take up to two years to recover from a flood. Many do not have business interruption insurance. Some do not survive.  Small businesses are essential to social cohesiveness: the corner shop, the village post office, the doctor, the dentist, the hairdresser, the pub, the café, the local plumber, provide more than just goods and services. They provide local employment, and help cement communities together. Climate change is a new risk factor which in some areas of the country will threaten the survival of many SMEs.  Small businesses in the construction industry also suffer from the psychological impacts of a flood. While helping flood survivors to rebuild their lives they often share the anguish and anger of the families they are helping.

Yes we were working day and night; it was quite stressful to be working in some of the people's houses - they'd be coming round every day, crying. Their bairns … they were heartbroken. Most of them never went back to their houses the emphasis as far as the media was concerned was … people‟s homes … they didn‟t seem to be as interested in businesses

The AXA Survey

Previous surveys32 of AXA data have shown that  From a sample of 2,420 businesses some 90% are under insured. This equates to a total of £865m under insurance33  Excluding the self-employed, 1 in 3 of AXA’s small business customers do not have Business Interruption cover34 which could enable them to continue to pay wages when the business is closed and help them to recover more quickly.  The length of business interruption has increased considerably in the last ten years as businesses become more complex, and more are damaged by flooding35. The average interruption period has increased from 8 months in 1996 to 14 months in 2005.  The average cost of a business interruption claim36 from a flood has increased from £22,000 in 2001 to £35,000 in 2005.

It is very important that small businesses make sure they have adequate sums insured. For example if a machine worth £100,000 is insured for only £50,000 and it incurs £20,000 of damage, the insurer will generally only pay £10,000, this being 50% of the claim as the business is regarded as 50% uninsured.

One thing they don‟t tell you though if you haven‟t got enough insurance they will only pay out…-is it half?

For the purposes of this report, AXA commissioned a new survey, specifically of businesses in areas which have recently suffered from severe flooding.

32 These survey results are extracted from the AXA Presentation to HM Treasury Stern Review December 2005 33 AXA insurance data and the Building Valuation Service 34 AXA Insurance Customer Base Analysis by the PH Group 35 AXA Insurance Customer Base Analysis / GAB Robbins 36 AXA Insurance Customer Base Analysis / GAB Robbins 20

Well I‟m pretty much the same as everybody else really. We lost vehicles, stock, we lost our office stuff and everything else and emotionally it was really difficult to come to terms with losing 35 years of business.

While many small businesses in these areas were concerned about the risk of flooding causing disruption to the business, the majority, (71%) were not concerned or not at all concerned. 69% had no form of business continuity plan37, despite the statutory duties on local authorities to extend their civil protection duty beyond emergency planning to address risks to local businesses under The Civil Contingencies Act 2004.

Does your business have a practical contingency plan?

Without a practical 69% contingency plan

With a practical 31% contingency plan

Only 64% confirmed that they had insurance against business interruption or loss of earnings, - a third were uninsured for these risks. This confirms the previous AXA survey mentioned above.

Which organisations were the most helpful?

Small businesses which had not been flooded said that if they were flooded they would expect most help would come from the emergency services (92%) followed by their insurance company (74%). Interestingly, for business established more than 20 years these figures rose to 95% and 86% respectively.

The Environment Agency/Scottish Environment Protection Agency (SEPA) was expected to be helpful by 61%, rising to 63% in the case of businesses established for more than 20 years.

The lowest score was for central government where help was expected from only 31% of respondents. This figure fell to 28% for long established businesses.

60% expected that the local council would be helpful if they were flooded.

37 Guidance on preparing continuity plans for small businesses is available from http://www.axa4business.co.uk/bc/guide.asp

However, very different answers came from businesses which had actually suffered recent flooding. All of them found that the amount of help they were given was less than those who had not been flooded would have expected.

 Here it was insurance companies which came top, with 66% finding them helpful.

There were a further 20% of “don’t knows” which perhaps reflects the fact that for many, their claims were still outstanding, or perhaps they were uninsured. It is interesting that in a previous survey38 of small businesses after the Autumn 2000 floods, it was also found that it was the insurance companies which provided the most help and the highest satisfaction levels. The highest dissatisfaction level was with the Environment Agency and local authorities.

Generally there were a high level of “don’t knows” in this group, but even so there seems to be a highly significant difference between expectations of help and actual help given.

 The score for the emergency services dropped from 92% to only 44%  The Environment Agency/SEPA fell from 61% to 27%.  Utilities companies fell from 67% to 39% and  the local council fell from 60% down to 38% although council results varied from 25% to 55% perhaps depending on the local council concerned.

You certainly wouldn‟t go to the council for advice.

Those which had experienced flooding said that they had very little help from the authorities, the same result as the 2000 floods survey by the Federation of Small Businesses.

What really disappointed me was going to (the) Council and saying „What kind of help can I get?‟ and they turned round to me in no uncertain terms because you have no insurance „You are on your own‟.

The council were no help at all, it was basically „it's your problem get on with it‟.

Finding help after the floods was difficult, we phoned up the council because we had 7 fridges and freezers then when they wouldn‟t move them because they said we weren‟t residents. I said „Well you know we pay our business tax just like council tax‟.

These results perhaps need some explanation. In most developed countries, the government compensates flood survivors, or provides reinsurance cover for insurers, the main exceptions being the UK, Argentina and Israel. In the absence of government compensation, one of the results is that there is a public perception that insurers have a “social duty” to provide cheap cover for everyone39. In 1961, insurers agreed to respond to this demand and undertook to provide low cost flood insurance for all UK homes and shops regardless of the flood risks. This was extended in January 2003 to apply to all types of small businesses, so that for example, riverside pubs and hotels were now “guaranteed” to be able to get flood insurance for the first time. Over the years there has been a growing “take up” rate of private insurance in the UK, both from private households and small businesses and by 2004, 93% of domestic owner- occupiers had contents insurance. This has meant that insurers have become financially strong and technically sophisticated in managing flood risks, but it has also enabled property

38 Barter, A.,2002 “Autumn 2000 Flood Survey” Federation of Small Businesses (South East). Polegate, England.

39 Clark, M., Priest, S. J., Treby, E. J., Crichton, D., 2002 “Insurance and UK Floods: a strategic reassessment.” A Research Report for TSUNAMI. University of Southampton, Southampton. 22 developers to sell properties in flood hazard areas because buyers have been able to get insurance and mortgages. This is one reason why the removal of the guarantee from January 2006, for new policies in high flood risk areas is so significant, especially at a time when the government is hoping to increase the number of houses built in low lying parts of south east England.

Without government compensation, adequate insurance protection is essential, but some small businesses have had problems in obtaining insurance cover the Environment Agency said it didn‟t really matter because these floods were never going to happen. So if these floods won‟t happen again why can‟t I get insured?

Responsibility

Small businesses or their landlords are responsible for protecting their own property against flooding, but

 43% thought that apart from themselves, their local authority was mainly responsible for protecting businesses against flooding.  41% thought that the authorities were not doing enough to protect against flooding.

There is a difference between Scotland and England in this regard. While no local authorities are responsible for flooding, in Scotland the local authority does have responsibility to maintain watercourses and to report every two years on all flood incidents in their area and what action they have taken to prevent a recurrence40. This means that insurance companies and flood survivors can and do regularly sue Scottish local authorities for any breach of this statutory duty which results in damage. This does not happen in England.

Many floods in England are “muddy” caused by earth washed away from fields onto roads. Scottish local authorities have powers to require farmers to prevent this41. There are no similar powers in England.

Scottish local authorities also have permissive rights to construct flood defences for which they can obtain 80% grants from central government. This means that planners and councillors know that if they allow development in the floodplain, they are the ones with the extra work of having to also design and build flood defences. They cannot pass the problem (or the blame) to the Environment Agency.

Cost of lost working hours

There was a wide variation in the effects of the flooding on the number of working days lost and the costs to the business. Where the business had less than four employees, 53% said that all staff were able to work throughout. This dropped to 23% for firms with more than 10 employees. This does not necessarily mean that small businesses are more resilient, it could mean that they may be more driven by economic imperatives. On average, businesses lost over 50 working days to a flood event, but there was again a wide variation. This is no doubt largely due to the type of business and the type of flood and is an aspect where further research is needed.

There are a lot of businesses round about that are still closed. We had a garage across the road they are totally closed they are never going to open again.

40 Section 6 of the Flood Prevention and Land Drainage (Scotland) Act 1997 41 Section 99 of the Roads (Scotland) Act 1984 23

On average, small businesses lost around £15,000 from flooding. This depended very much on the size of the business:

Table: cost of lost working hours, damage to stock and premises and loss of custom 1 to 3 employees 4-10 11-50 £7,900 £18,070 £27,480

Flood warnings

Only 8% of businesses received any form of flood warning. Warning systems seem to be designed very much for domestic householders rather than small businesses.

Those who had received an adequate warning of the flood generally suffered lower losses, but with such a small number of businesses receiving a warning the samples were too small to draw conclusions from this. One would expect a warning to enable some steps to be taken, for example moving children and the elderly to a safe place, but in the UK, flooding is often sudden and unexpected with little time to take further action.

It was just an automated message my mobile phone went at the same time 10 past 5 in the morning and we were past our knees in water by then!

…they had a warning. Some people didn‟t care about moving their stuff, they didn‟t take it seriously. the vulnerable and the elderly are in these bungalows. they can‟t take their possessions upstairs

Recovery Time

By contrast, the length of time taken to recover from a flood can be many months or even years.

On average those who had not been flooded expected it would take them less than a month to recover from a flood. Those who had actually been flooded found on average it took more than two months to recover with some taking more than 3 months.

It took 3 months with dehumidifiers- 3 going 24 hours 7 days a week and 3 heaters and blowers trying to dry the brick out first but even the new plaster downstairs is all cracked and it‟s all cracked upstairs in the flat.

…being a pub where people are going drinking all the time they go somewhere else and they get used to going somewhere else and you just can‟t get them back again. It‟s very difficult to get them back. It‟s very, very hard work

Measures to reduce flood damage costs

There are a number of measures which small businesses can take. They can reduce flood damage using resistance and resilience techniques.

Sandbags are a waste of time.

Why do you think that then?

The water can just come through the air vents and up through the floor. 24

The problem we have, there are so many holes in all the walls plus the water comes up through the drains, it would be virtually impossible to make it flood-proof.

Insurers can advise SMEs on the latest developments in temporary flood protection and there is advice available on the internet42. Of course they should also make sure that their insurance is adequate and up to date.

That sum assured, if you are not insuring your property for the right sum assured, and let‟s say they assess that you‟re paying a premium on a sum assured that is 50 percent of the actual sum assured, then they only pay out 50 percent of the claim.

Climate change

The focus groups showed that there was a high perception of climate change threats, indicating that the efforts of government and research institutes are being effective in spreading the message. However a number thought that the threat of climate change has been blown out of proportion.

I just think things go in cycles. It may have some affect but I don‟t think you can write it all down to global warming.

The survey found

 46% thought that the issue of climate change has been blown out of proportion  26 % thought that climate change is a real and serious threat to their business  85 % thought that climate change is a serious problem for the world in general

Views on climate change

85%

46%

26%

Serious problem for the Blown out of proportion Real threat to my business world

This is an important result and deserves further investigation. As was seen earlier in this report, with up to 35% of new small businesses unable to survive their first three years of

42 Crichton, D. 2004. “Temporary local flood protection in the United Kingdom. - An independent assessment.” A Benfield Hazard Research Centre technical report. Free download from: http://www.benfieldhrc.org/activities/misc_papers/Temporary_local_flood_protection.pdf

25 operation, perhaps many businesses have more immediate threats in mind besides the longer term impacts of climate change. However while the survey showed that only 26% overall believed climate change was a serious threat to them, the variance was remarkably small and this figure is actually slightly higher at 29% for relatively new businesses and reached 30% for retailers and wholesalers.

It is interesting to note that while nearly three quarters of small businesses do not connect climate change with a threat to their business, this does not mean that they are not taking action to address the threat of extreme weather conditions. For example, here are some of the actions revealed by our survey:

Home working or flexible working 50%

Review commercial insurance 51%

Review „weather proofing‟ and weather related risks to your premises 43%

Get more advice from government bodies 32%

Consider moving 25%

Only 16% of respondents were taking no action which seems to indicate that the majority are taking the risks very seriously indeed.

Conclusions from the surveys

Government and researchers seem to have been successful in raising awareness about climate change amongst small businesses, but there is still a long way to go to impress on them the seriousness and urgency of the threat to their survival. SMEs are vital to the UK economy, but they are ill prepared and most do not take the threat of climate change impacts to themselves sufficiently seriously. Perhaps they are too concerned with short term issues to worry about decadal or longer term threats. Perhaps they are not aware of the problems of inadequate sums insured or the increasing length and cost of business interruption claims.

SMEs, and as a consequence the 22million people they employ, are often the “poor relation” when it comes to assistance for flood survivors. The authorities and the media concentrate on domestic properties. SME expectations of assistance from emergency services, central government, local authorities and others are disappointed when a flood event actually occurs. As our survey has shown the greatest help in such cases comes from their insurance company.

The UK is unique in the world in the extent to which people depend on private insurance cover for flood risks. To support social inclusion, insurers have gone to great lengths to cover as many people as possible with schemes to enable tenants in the social rented sector to buy insurance with small payments on a weekly or fortnightly basis, either with rent, or separately for those with rent arrears. A pensioner in many areas can get full insurance cover for only £1 per week. Despite this, only 39% of social rented sector tenants in England and Wales had contents insurance in 2004. In Scotland, the figure is 57%. These schemes were administered for insurers by local authorities, but the take up rates are expected to reduce as housing associations take over control of social rented sector properties43. This is an important issue and is revisited in the social exclusion section later in this report.

43 Demos and Toynbee Hall, 2005. “Widening the safety net – learning the lessons of insurance with rent schemes”

As already pointed out, the UK insurance industry is not only socially responsible, it is financially strong with considerable expertise in flood mapping and modelling. Its National Flood Insurance Claims Database is the biggest in the World and envied by many other countries. UK insurers are world leading experts when it comes to flood.

Part B What does the future hold for the UK?

Demographic changes Businesses are dependent on their customers, but customers are also dependent on local SMEs, especially customers who are elderly people living alone. Current projections are that more people will live alone and live longer  The proportion of people aged over 65 is projected to increase from 16 per cent in 2004 to 23 per cent by 2031.  In 2004 there were 7.0 million people living alone in Great Britain, nearly four times as many as in 1961.  Between 1971 and 1998, the overall proportion of one-person households almost doubled from 17% to 31%, and the proportion of households consisting of one person aged 16 to 59 tripled from 5% to 15%.

For old people living alone, small businesses such as the corner shop and the small contractor are important. As these people grow older and less mobile they will become vital.

Demographic changes mean that many more new homes are needed. The Government’s Sustainable Communities Plan44 sets out a strategy for the development of 200,000 new homes in the South-East by 2016. There is little land left in the south east except for flood plains which will become increasingly dangerous as the climate changes and sea levels rise.  Based on current trends, the government predict45 an increase in total households in England of 4.8 million in the 2003-2006 period (to a total of 25,713,000 by 2026) and the House Builders Federation is calling for more land for development46.  Many of these properties would be in high flood risk areas: 60% are to be built in London, the East, the South East and the South West, and of the projected annual growth rate of 209,000; 150,000 are expected to be one-person households.

The future impact of flooding on UK SMEs The Government has seven key strategic themes of their Action Plan for Small Business. These are:  Building an enterprise culture  Encouraging a more dynamic start-up market  Building the capability for SME growth  Improving access to finance  More enterprise in disadvantaged communities  Improving SMEs' experience of government services

If it is indeed the case that 90% of small businesses are underinsured and ill prepared, as the research above has shown, the effect of floods will hit small businesses particularly hard, especially in “disadvantaged communities” and in turn the national economy.

44 Sustainable communities: building for the future, Office of the Deputy Prime Minister, February 2003,

45 New Projections of households for England and the Regions to 2026, ODPM Statistical Release 2006/0042, 14 March 2006 46 House Builders Federation Press Release, 24 August 2006. 27

Proportion of businesses uninsured against catastrophic weather events

54%

38%

26% 25%

Less than £50k £50k-£99k £100k-£400k £500k+

 Location is often critical for small businesses. As more people live in flood hazard areas, small businesses will have problems following them because of insurance difficulties.  Insurance blight will force small businesses to relocate to low flood hazard areas if they are to keep insurance cover.

Nevertheless it is assumed that small businesses will be forced to follow housing into flood hazard areas, even if they cannot afford insurance.

In the last six years  The average commercial weather damage insurance claims cost for all businesses has been £66m per quarter.  In quarter 4 of 2000 they jumped to £289m due to the autumn 2000 floods.  Without insurance those businesses would have suffered over £200m losses from just this one flood event. As future flood events will be concentrated in coastal areas and low lying floodplain land, not all businesses will suffer, but those that do, some 130,000 businesses, according to one estimate47, will suffer badly.

UK Climate Impacts Programme The UK Climate Impacts Programme (UKCIP) has published scenarios for future climate change developed for the Government by the Hadley Centre which is part of the UK Met Office and the Tyndall Centre. They have estimated the range of likely climate conditions over the next 100 years for different levels of greenhouse gas emissions, namely High, Medium High, Medium Low and Low. In a guidance note issued by UKCIP48, there is a strong emphasis on the importance of local authorities taking climate change into account in decisions with long term consequences such as the planning for new developments, and the need for adaptation. It contains no reference to a possible role for the insurance industry or

47 ABI statement of principles on the provision of flood insurance 48 UK Climate Impacts Programme, Local Government Association, Improvement and Development Agency for Local Government, Defra, ODPM, CoSLA and the Welsh Local Government Association, 2003. “Climate Change and Local Communities – How prepared are you?” UK CIP, Oxford, July 2003. 28 the fact that many of the problems are created by the government itself in insisting on targets for building new housing in areas at risk of flooding.

Foresight Scenarios Foresight is a government backed technique for thinking about the future49. A central aspect is the four scenarios of what the world might be like in 20 years; this provides the context for developing theories about the development of small businesses in the future. The scenarios are not prescriptive; they simply describe how the UK might look in the near future, exploring alternative directions in which social, economic and technological changes may evolve. In a major project using some of the leading UK experts, work has been done to combine the Foresight scenarios with the UKCIP projections to produce detailed projections of different climate change flooding impacts depending on how the UK is governed in the future50.

The Foresight scenarios consider only two dimensions of change, namely social values and governance systems.

Social Values Dimension This takes account of patterns of economic activity, including consumption behaviour. At one end of the scale (CONSUMERISM) is a society dominated by consumerism, private consumption and short term satisfaction. At the other end (COMMUNITY) there is a greater concern with long term social goals such as sustainable economic development, social cohesion, and equality. In practice society is likely to be somewhere between the two extremes.

Governance System Dimension At one end is GLOBALISATION, where governance is increasingly moved away from the national level, with more devolved power to local organisations, and also more power to multinational organisations such as the EU and the World Trade Organisation. At the other end is REGIONALISATION, with national sovereignty preserved or even strengthened at national level. From these concepts, a grid can be produced as shown below:

49 See www.foresight.gov.uk

50 Evans, E., Ashley, R., Hall, J., Penning-Rowsell, E., Saul, A., Sayers, P., Thorne, C. and Watkinson, A. 2004. “Foresight. Future Flooding. Scientific Summary: Volume I Future risks and their drivers.” Office of Science and Technology, London.

GLOBALISATION

World Global Markets Sustainability

CONSUMERISM COMMUNITY

National Local Enterprise Stewardship

REGIONALISATION

Thus a combination of Consumerism and Globalisation brings a scenario called "World Markets", and so on. There will be big differences due to: 1. Varying amounts of increases in climate change impacts, 2. Different increases in the value of assets at risk, and 3. Different increases in new development in flood hazard areas.

These differences will depend on which scenarios apply. The right hand side of the grid will have lower increases than the left hand side.

Here is a description of each of these four scenarios, as described by the government with some comments from an insurance and small business perspective shown in italics. Bear in mind:  Currently flood damage for the UK averages around £1.4billion per year.  Current UK spending on flood defences averages around £800m per year.  So the total cost of flood damage is currently £2.2bn per year  In England and Wales alone, 4m people and property worth £200bn are at risk already from flooding.

Current assumptions are that small businesses account for 7.5% of property values in flood hazard areas. If this is used as a rough guide, it can be assumed that flood damage to small businesses is around 7.5% of the total flood losses51. This would mean the current average annual cost for small businesses just from flooding is approximately £105m. The following scenarios assume existing policies on flood defence spending are maintained. They do not take into account recent cuts in flood defence spending announced by defra. The research also indicates the number of people where the flood hazard exceeds the threshold announced by the insurance industry where insurance may no longer be available after January 2006.

World Markets: High economic growth and high greenhouse gas emissions

This is a world where the merger of businesses to form ever bigger groups will continue, until there are a few very big multinational players and SMEs are relegated to niche markets. UK Gross Domestic Product grows at 3% a year and the fastest growing sectors are leisure and financial services. Manufacturing and agriculture will decline. More new building will take

51 Werritty, A, Black, A, Duck, D, Finlinson, B, Thurston, N, Shackley, S and Crichton, D., 2002. “Climate change: flooding occurrences review”. Report to the Scottish Executive Central Research Unit, Edinburgh

30 place in flood hazard areas, and as a result more SMEs will become uninsured and more vulnerable to insolvency from flood events. There may be an accelerated nuclear energy programme, but if not, global delay in any serious efforts to reduce greenhouse gas emissions means that climate change will accelerate dramatically with many more flood events.  Annual flood damage will average £27billion by the 2080s, (0.19% of GDP) of which nearly £2 billion would be suffered by small businesses each year.  3.5m people uninsurable

Global Sustainability: Low economic growth and low emissions

This is where the big non governmental organisations like WWF become more powerful and forge partnerships with governments to influence policy. There is a role for trade associations such as the Association of British Insurers and the Federation of Small Businesses to have a greater say in policies which affect their members, and in particular to force climate change adaptation and mitigation measures. Technology systems are likely to be harmonised across boundaries, in order to reduce uncertainty and improve efficiency. UK GDP will grow at a slightly slower rate of around 2% pa, with the fastest growing sectors being renewable energy and electronic commerce. Fossil fuel based power systems, agriculture and manufacturing will decline. Index of Sustainable Economic Welfare will also grow at 2% pa. There will be improvements in air quality and water quality, biodiversity will stabilise and there will be strong climate management, but with reduced standards of living, with local communities being dependent on intermittent sources of energy like solar and wind, which will make tele-working difficult.  Annual flood damage will average £7billion by the 2080s, (0.08% of GDP) of which around £500m would be suffered by small businesses each year.  2.4m people uninsurable

National Enterprise: Low economic growth, but medium high emissions. This is the world of the smaller, more flexible business, which can tailor its products to the many niche markets in this fragmented business economy where the consumer is “king”. This situation is unlikely to be sustainable, however, as growing environmental and climate change related disasters will threaten the viability of such businesses. UK GDP will grow at 1.5% pa, with the fastest growing sectors being private healthcare and education. There will be a decline in the financial services sector, and in high tech specialist services. While GDP will grow, the Index of Sustainable Economic Welfare will fall dramatically at around –4% pa due to cuts in spending to offset social and environmental damage. For example in the UK, there will be demands to switch public spending from schools and hospitals into flood defences for property built in floodplains, new flood protection for London, and the repair of flood damaged infrastructure. Air and water quality will decline rapidly, and biodiversity will deteriorate. Attempts to control climate change will collapse.  Annual flood damage will average £20billion by the 2080s (this will have the worst effect on GDP of the four scenarios at 0.41% due to slow economic growth) of which around £1,500m would be suffered by small businesses each year.  3.5m people uninsurable

Local Stewardship: Low economic growth and medium low emissions. This is a world where stronger local and regional governments allow social and ecological values to be demonstrated to a greater degree at local level. Strict planning controls and sustainable flood management at a local level may reduce flood risks in some areas. Two of the authors of the Foresight report on flooding have pointed out that sustainable flood management will be much more cost effective than traditional engineering solutions52. For

52 Evans, E., and Hall, J., December 2004. “A new climate for flood planning” Ingenia, the Journal of the Royal Academy of Engineering, December 2004.

31 example, they have found that engineering solutions alone would cost £52 billion just to manage the additional risks from climate change. This compares with £22 billion when using engineering in concert with a range of non-engineering measures.

This will favour smaller local businesses rather than nationals. UK GDP will grow at 1% pa, as will the Index of Sustainable Economic Welfare. The fastest growth sectors will be small scale intensive manufacturing, locally based financial and other services, and small scale agriculture, including growing bio fuels. Retailing and leisure may decline. .  Annual flood damage will average £4billion by the 2080s (0.08% of GDP) of which around £300m would be suffered by small businesses each year.  2.2m people uninsurable

General Points  In all scenarios, Foresight research shows that some parts of England are particularly exposed. These are the Lancashire/Humber corridor, parts of the coast (particularly in the south-east) and major estuaries. To this list can be added more recent developments in the sub regional growth zones outlined in the next section.  Many small businesses operate in the agricultural sector. In agriculture, fishing and forestry, 94% of employment is in small businesses.  Under World Markets and Global Sustainability, more agricultural land will be used for housing, leading to loss of work for farmers and associated small businesses.  Under Enterprise and Local Stewardship scenarios, agriculture has greater value as more farmland is devoted to flood storage and growing bio energy crops for the production of bio-diesel and bio-ethanol to reduce fossil fuel use. Rural development is based on self sufficiency in energy and food production and less dependence on vulnerable electricity transmission lines.

Urban Drainage Our outdated and overloaded sewage and drainage systems will overflow much more often with climate change, leading to additional flooding costs. The additional annual average costs are shown in the table below;

Table: Annual average costs of flooding by 2080 (£billion at 2004 prices) Scenario Drainage floods River and coastal floods Total World Markets: 15 27 42 Global Sustainability: 3.9 7 10.9 National Enterprise: 10 20 30 Local Stewardship: 1.5 4 5.5

This does not include the costs of modifying drains. For example, gully traps may have to be removed as in France, to reduce disease risks. Our research has shown that the floods in Carlisle were severely aggravated by overloaded sewers. Urban drainage systems and sewers will not be able to cope with the severity of sudden intense rainfall events projected in climate change scenarios. Sewage flooding is a particularly unpleasant and expensive type of flooding, made worse by the increasing use of ground floor toilets required by government building standards even in flood hazard areas. Even areas with modern wastewater systems will not be immune. The newest and biggest system in the UK cost £120m and was completed in 2002. It was not designed to take climate change into account and provides only an 800mm pipe for much of its 35km length for the sewage and surface water drainage from a 270,000 population equivalent. It has already resulted in urban flooding at least four times since it was opened, the most recent being in August 2006. Drainage floods are important for insurers because they can happen anywhere in the country. Insurers can use the premium mechanism to discriminate against risks in flood plains and low lying coastal areas, but there is not enough data to discriminate against areas with overloaded drains. 32

There is an important exception to this: There will be different impacts in England and Scotland for legal reasons:  In England and Wales, Section 106 of the Water Industry Act 1991 requires water companies to accept connections to their sewer systems from new buildings, even if the sewer system is already at full capacity. Sewage contaminated floods from overloaded drains and sewers will be a particular and growing problem.  This Act does not apply in Scotland where no new development is allowed unless the drainage and sewer system already has spare capacity.

Which scenario is the most likely?

Already, some clear distinctions are emerging between the different countries of the UK in other ways:  England is moving towards the “World Markets” scenario where economic growth is the main objective and property developers are allowed to develop in flood hazard areas in the drive to increase the number of houses in the south east of England regardless of the consequences.  Scotland is moving towards the “Local Stewardship” scenario, with its emphasis on sustainable development, renewable energy, sustainable flood management, and its strict control of property development where local planning strategies are drawn up in consultation with the insurance industry.

This means different consequences for small businesses which are more likely to thrive under a Local Stewardship scenario. Some of the implications are explored in more detail in the next section.

The foresight scenarios are a valuable way of looking into the future, and the results depend on which scenario is selected. Current estimates are that 130,000 businesses are located in areas at risk of river and coastal flood in the UK53. 99.3% of these are small businesses employing fewer than five people. This means that if this number remains essentially unchanged the average costs of flood damage per small business each year by 2080 just for river and coastal floods would be  World Markets: £15,385  Global sustainability: £3,846  Enterprise: £11,538  Local stewardship £2,308 In addition, all urban properties especially in England and Wales will suffer from frequent localised flooding from overloaded drains and sewers. On average, SMEs have only five employees. Thus under the World Markets scenario river and coastal flood damages alone are projected to cost over £3,000 per employee per year by 2080.

This is not the whole story;  Stress is a major factor which cannot be quantified easily in money terms, the damage to property, disruption of business, loss of profits and future sales are just one aspect. There is also the worry about future flooding, future insurance costs, and the prospect that the business may become insolvent. These add to anxiety for SME managers and owners. Business continuity planning can help reduce this anxiety.  Sole traders will be hardest hit, they may be less able to afford big increases in insurance costs or long term business disruption. They may be tied in to long term leases which make it hard to relocate.  The damage will be concentrated on certain parts of the country such as coasts and floodplains  Urban areas will have particular problems as more land is covered in buildings and paved areas, rainfall run off will increase the risk of flood from drains and watercourses, especially if inadequately maintained or over loaded.  Damaged infrastructure, especially transport systems will disrupt business activity.

53 ABI statement of principles on the provision of flood insurance 33

 The impact of the Water Framework Directive54 and other environmental regulation could prevent the modification of rivers and lakes to adapt to the increased rainfall that climate change will bring.  Changing agricultural practices such as the use of winter cereal crops can result in an increased run off from farm land of muddy water into urban areas.  Dependence on computers and other electronic equipment which is easily damaged in a flood increases vulnerability.  Blight will become a serious problem as insurers withdraw from some areas altogether under pressure from the government regulator to manage their exposures to risk.  Energy costs are already escalating and are likely to continue to do so, not only due to carbon taxes on fossil fuels but due to our increasing dependence on imported fuel.  Greater wealth means greater losses.

The Foresight research indicates that if nothing is done, total average flood damage costs by 2080 could range from £5.5bn to $42bn per year. Is the insurance industry expected to ignore such figures in case it is accused of “scaremongering”? Is it expected to sit quietly until losses become so inevitable for millions of residents and businesses in flood hazard areas that insurers would no longer be able to provide cover? Given a few bad flood years in a row, could there be economic meltdown if nothing is done? Currently, England seems to be on track for the worst case scenario while Scotland is on track for the best case scenario. It is in the interests of insurers to make insurance sustainable and to help small businesses to survive climate change.

Part C How insurers could make a difference

“I am curious as to what the effect of this (research) is going to be because something has to be done.”

There are two aspects to dealing with climate change, mitigating the impacts by controlling greenhouse gas emissions, and adapting our buildings and infrastructure to become more resilient to severe weather. Insurers are active in both areas.

Mitigation The World Wide Fund for Nature (WWF) strongly supports emissions trading; it is a market mechanism that can limit the total amount of CO2 emissions with maximum flexibility and least cost. They believe that it is important for the European Union to continue and strengthen the European Emission Trading Scheme.

Insurance companies are large institutional investors and this gives them the power to influence the behaviour of the major companies they invest in. These major companies increasingly recognise two main challenges from climate change:  More severe and uncertain weather events  Regulatory issues arising from carbon emission compliance requirements. Shareholder concern over the management response to climate change risks is being seen in a growing number of climate change resolutions filed at shareholders‟ meetings. “Capital markets increasingly value disclosure and climate change is rising up the agendas of major pension funds, asset managers, bankers, insurers and analysts.”

54 Water Framework Directive, 2000. Directive 2000/60/EC of the European Parliament and of the Council of 23 October 2000. Official Journal (OJ L 327) on 22 December 2000 34

This is a quotation from a report55 on the Carbon Disclosure Project‟s third information request from institutional investors to the FT Global 500 companies as at 1st February 2005. The disclosure rate this time was the highest ever at 71%. Total carbon emissions from responding companies represented approximately 13% of total anthropogenic greenhouse gas emissions worldwide.

The biggest change in carbon dioxide for 420,000 years.

100 20,000 years ago to present day. Temperature CHANGE in degrees Celsius, 80 Carbon Dioxide CHANGE in parts per million by volume 60 Temperature 40 Carbon Dioxide 20

-20

Source: Crichton

The effects of human activities now go well beyond natural variability. Humans have become a planetary scale force which has pushed the Earth beyond its normal operating range. Normal graphs show the absolute values of emissions, this one shows the rate of change instead which emphasises the problem.

Source: Crichton

The Carbon Disclosure Project The 225 signatories to the Carbon Disclosure Project are institutional investors including insurance companies which represent over $31 trillion in assets and their latest report indicates that following the Kyoto Protocol and the European Emissions Trading Scheme many major companies are changing their strategies to benefit from the new carbon regulations. This is not just happening in Kyoto countries, there are a growing number of clean development regulations in non Kyoto countries which indicate a global shift to clean technologies.

The Carbon Disclosure Project provides a secretariat for the world's largest institutional investor collaboration on the business implications of climate change. The project represents an efficient process whereby many institutional investors collectively sign a single global request for disclosure of information on greenhouse gas emissions. The Carbon Disclosure Project website is the largest registry of

55 Innovest, 2005 “Carbon Disclosure Project 2005” Carbon Disclosure Project, London. Available from www.cdproject.net 35 corporate greenhouse gas emissions in the world and in 2006, their information request was sent to over 2,100 companies across the globe.

United Nations Environment Programme – Finance Initiative

“…the mainstream investment community is waking to the burgeoning opportunities associated with sustainability promoting companies, technologies and investment funds. From clean-tech, to renewables and ecosystem services, the growth industries of the 21st century are emerging at an accelerated pace." - Achim Steiner, UNEP Executive Director and United Nations Undersecretary General.

Over 160 financial institutions around the world are signatories to the principles of environmental commitment outlined in the UNEP-FI programme. 72% of these companies are European and 12% are Asian. 7% are from Canada or the USA. For more details see their excellent website, http://www.unepfi.org/ .

Adaptation Of course insurance companies are not only major institutional investors, they are also risk carriers. In this they have centuries of expertise and are not known for exaggeration. The insurance industry is taking climate change risks very seriously indeed: “… the sheer magnitude of climate change could in future impact a large number of industries to such an extent that sustainable insurability may ultimately be put into question.” - claimed a report by the Chief Risk Officers of 14 of the biggest insurance companies in the world56. June 2006

“…We don‟t know exactly what impact climate change will have. But we do know that it presents society and the economy with an increasing level of uncertainty as it seeks to manage its risk. We believe that it is time for the insurance industry to take a more leading role in understanding and managing the impact of climate change.” Lloyds Market Association57, June 2006.

WWF worked with the Allianz Group of insurers in 2005 to produce a report58 intended to “advance the debate in the financial community, and to propose solutions”. The report identifies risks for the sector which are due to climate change, and develops actions that demonstrate how integrated financial services companies can turn these risks into opportunities.

56 Markus Aichinger, Allianz, Eberhard Faust, Munich Re, JeanNoël Guye, AXA, Pamela Heck, Swiss Re, Annabelle Hett, Swiss Re, Peter Höppe, Munich Re, Ivo Menzinger, Swiss Re, Ernst Rauch, Munich Re, Samuel Scherling, Swiss Re, Martin Weymann, Swiss Re, June 2006. Climate Change & Tropical Cyclones in the North Atlantic, Caribbean and Gulf of Mexico. Emerging Risk Initiative – Position Paper. CRO Forum, Geneva. 57 360 Degree Risk Project 2006. “Climate change; adapt or bust” Lloyds of London, With the assistance of: Acclimatise., Insurance Information Institute, New York, Lighthill Risk Network, London., Lloyd‟s Market Association, London 58 Allianz and WWF, June 2005. “Climate change and the financial sector: an agenda for action.” 59pp Allianz and WWF, London 36

The insurance industry knows about risk better than anyone else. They have the best expertise, the best modelling capability, and the best data. The Chartered Insurance Institute (CII), which sets standards for professional competence in the insurance industry in the UK is due to publish a report on climate change which is currently in preparation. This will be their third report59 on the subject since 1994.

Energy Use Scenarios The only way to manage dangerous climate change is to switch to a low carbon economy as soon as possible. Some implications of four low carbon scenarios were set out by a Royal commission report (see panel). The extent to which of the four energy scenarios shown in the panel are likely depends on the Foresight socio economic scenarios of the future. It could be argued that all the scenarios are unlikely as they all envisage a significant reduction in energy usage and living standards, in order to reduce carbon dioxide emissions. This would have a serious impact on the survival of SMEs. In any case, so long as other major countries are increasing their emissions, UK political parties will have an uphill struggle unless they are prepared to whole heartedly endorse reliable renewables such as tidal and bio energy solutions in order to maintain standards of living in a low carbon economy. Short term intermittent sources such as wind and solar will not be enough. Scientific evidence shows that the levels of carbon dioxide in the atmosphere are already increasing at an alarming rate.

Royal Commission low carbon Energy Scenarios In June 2000, the Royal Commission Report on Environmental Pollution set out four low carbon energy scenarios for 2050. Here are extracts from their report with implications for small businesses added in italics: Scenario 1. - Unprecedented investment in non fossil fuel energy High cost of energy due to carbon taxes has cut demand to 1998 levels. Even so, to reduce carbon emissions by 60% needs  a four fold increase in nuclear power, combined with  200 offshore wind farms, each with 100 turbines  10,000 wave power machines  Several thousand micro hydro schemes  Tidal barrages on rivers such as the Severn, Humber and Thames.  Solar panels on all south facing roofs  Huge areas of agricultural land devoted to biomass crops  Such a big investment in renewable energy would change the face of the countryside, with large areas of land used for short rotation coppicing to provide biomass energy, and could regenerate the farming industry and agricultural insurance.   Scenario 2. - High energy costs/lower standards of living  Demand for energy has been reduced by 36% below 1998 levels through substantial increases in carbon taxes, with the revenue spent on energy efficiency. The high costs of energy would drive many small businesses into bankruptcy, lower standards of living, and prevent economic growth.  There would be opportunities for small business in supplying and servicing renewable energy systems if they can survive the high energy taxation costs themselves.   Scenario 3. - Nuclear  As for Scenario 2, but base load energy needs are supplied by a new generation of nuclear power stations, and by fossil fuel stations capable of recovering and disposing of carbon dioxide. Only about 2% of farmland would be devoted to biomass.   Scenario 4. - “Return to the caves”  In this scenario there has been a fall in energy demand of 47% over 1998 levels. Increased renewable energy will still be required, but its impact will be less. However the reduction in energy demand would be accompanied by a significant reduction in living standards.

59 Previous reports were: Study Group of the Society of Fellows of the Chartered Insurance Institute, May 1994. "The Impact of Changing Weather Patterns on Property Insurance", CII, London. And Dlugolecki, A. (ed), Agnew, M., Cooper, M., Crichton, D., Kelly, N., Loster, T., Radevsky, R., Salt, J., Viner, D., Walden, J., Walker, T., 2001. “Climate Change and Insurance.” Chartered Insurance Institute Research Report, London 2001 37

The biggest change in carbon dioxide for 420,000 years

100

60 Temperature 40 Carbon Dioxide 20

-20

Source: Crichton

SMEs can play an important part, but first they need to be convinced of the problem. Then they need clear direction from the government as to which way the government intends to go in the longer term. Then businesses can adapt their strategies accordingly in order to remain in business.

A positive approach is needed. We need not face a future of reducing our standard of living to compensate for the growth in pollution from other countries. There is an opportunity to look for new opportunities for growth, and an improved quality of living. Opportunities which do not involve burning irreplaceable fossil fuels.

For example:  Tax incentives to switch to bio ethanol and bio diesel fuel for transport.  Expansion of new mass transit systems such as high speed rail and urban light rail.  Decentralised energy network with local areas becoming self sufficient in energy to reduce transmission and disruption costs.  Encouragement of tele-working using new technology to allow more people to work from home or in communal village office centres away from flood risk areas.  Rural development based on self sufficiency in energy and food production.  A general movement of population centres away from flood hazard areas.

There should be a firm target of eliminating all dependence on fossil fuels (except for pharmaceutical purposes) by 2020 as they have done in Sweden. If they know that government means business, SMEs could play a major part in producing innovative solutions to help to achieve this.

In this way, Britain could show the benefits of a low carbon economy and show leadership in the international debate on bringing climate change under control.

As a start the government could endorse the concept of “Contraction and Convergence” developed in the UK by Aubrey Meyer of the Global Commons Institute60. This is the best framework for greenhouse reduction so far and it has achieved widespread support around the world, because it seems to be the only equitable way to share out so called “rights to pollute” the environment. The European Parliament, the Church of England and local authorities in Norwich, Bristol, Camden and Oxford together with the Conservatives, Lib Dems, SNP, and Plaid Cymru now support Contraction and Convergence. The insurance industry should continue to press for an increased pace of change in Government policy

Sea levels will continue to rise, storms will become more severe and move further south, floods and droughts will increase. AXA Insurance is a sponsor of the Carbon Disclosure Project which seeks to help to mitigate climate change by monitoring greenhouse gas emissions from big business. But mitigation of emissions is not enough. Society must also adapt to the changes predicted for our climate.  We have to adapt to a riskier world and we have to adapt now.

The insurance industry has a vital role to play in helping the SME sector to adapt through its expertise in risk management.

What is risk? While efforts must continue to mitigate greenhouse gas emissions, it is already too late to avoid an increase in floods and sea level rise. Society must increase its adaptive capacity to reduce risk.

The insurance industry arguably has the greatest expertise in measuring, pricing and controlling risk. The best way to manage risk is to examine the three component parts, hazard, exposure, and vulnerability. This can be illustrated by the “risk triangle”. The bigger the area of the triangle, the greater the risk. Each of the sides of the triangle should be addressed, looking for ways to reduce that side of the triangle. If one side can be eliminated altogether then risk is eliminated.

For example, flood risk can be reduced by  Not building in high risk areas (to reduce exposure),  using flood resistant or resilient construction, or even stilts or other innovative building design (to reduce vulnerability),  building flood defences (to reduce hazard).

At present exposure and vulnerability are increasing rapidly, while spending on flood defences is reducing to the level of the annual profits of a single large property developer. What can insurers do?

60 Meyer, A., and Crichton, D. January 2005. “Contraction and Convergence”. Post Magazine Weather supplement, 29th January 2005. London

Risk triangle

hazard exposure RISK

= THE AREA OF THE TRIANGLE vulnerability

If risk is measured by the area of the triangle, it can be reduced by addressing any one of the sides, looking for the easiest solutions. If one side can be eliminated altogether then there is no risk. For example moving property away from the flood plain eliminates exposure. The Risk Triangle is © Crichton, 1999.

- Flood hazard can be reduced using flood management measures. In the short term, civil engineering solutions such as walls, tunnels and dams can help, but in the longer term society has to learn to live with Nature61 and use more sustainable, non structural methods. - Exposure management is the most sustainable solution: avoid building in flood hazard areas and relocate existing property to safer areas. Insurers are already changing the economics of exposure: flood plain development is less attractive if insurance is expensive or not available, and can lead to flood blight. - Vulnerability adaptation can help to reduce the risk from both flood and windstorm. Building standards should be made more resilient and these standards must be enforced and made retrospective so that damaged building stock is reinstated in a more resilient way.

Architects and planners need to work with insurance industry experts to raise awareness of what is needed (see part three) and this is already starting to happen with guest lectures, text books62 and technical journal articles63 spreading the message.

61 Fleming, G., Frost, L., Huntington, S., Knight, D., Law, F., Rickard, C., Macdougall, K., Ferguson, A., The Institution of Civil Engineers Presidential Commission Report, “Learning to Live with Rivers” London, England, November 2001. 62 For example Roaf, S. Crichton, D., and Nicol, F., 2005 “Adapting Buildings and Cities for Climate Change” Architectural Press, Oxford. ISBN 0 75065 9114 63 For example Crichton, D., 2006. “Unanswered questions on climate change and flood risk”. Pp14-15, Town and Country Planning Journal. Vol. 75, Number 1., January 2006 40

The Engineering and Physical Sciences Research council has funded a suite of six major research projects as part of the “Building Knowledge for a Changing Climate” initiative. Despite the fact that insurers arguably have much higher levels of knowledge and experience in this area than most universities, only one64 project “ASCCUE”, has invited any input of data or expertise from the insurance industry. It is perhaps no coincidence that ASCCUE is led by the planning community which recognises the importance of the insurance industry.

Exposure

Last year the insurance industry warned the government and planning authorities that from the beginning of 2006, they could no longer guarantee to quote for any properties located in areas where the flood hazard is greater than 1 in 75 years (a 1.3% probability) irrespective of whether flood defences are constructed65. This means that the owners of such properties will be less able to “shop around” for cheaper cover, and it will be harder to insure new properties in such areas.

This threshold could be changed at any time: insurers regard any risk higher than the 1 in 200 year probability as high hazard, and climate change is increasing the probability of flooding, especially near the coast.

Where insurance already exists for domestic properties and small businesses the intention is that the existing insurer will maintain flood insurance cover provided

 premium “reflects the risk of flooding”. This means substantial increases in cost and excesses where the hazard is higher than 1 in 200 years.

 improvements to reduce the risk to less than the 1 in 75 years (that is a 1.3% probability) are “scheduled for completion within the next five years” Current spending on flood defences in England is inadequate according to the government’s own research and even spending on maintenance of existing defences is to be reduced.

For the time being in order to avoid a collapse of property prices a special guarantee is provided by insurers for domestic properties but not for small businesses:

 for houses the current insurer will maintain cover if the property is sold

 for small businesses the current insurer may maintain cover where they are sold.

subject to normal underwriting criteria.

Following insurance lobbying, Scotland, Wales, and N. Ireland have changed their planning policies to prevent future development where the flood risk exceeds the one in 200 year return period. However in England:

 Government has designated new Sub Regional growth areas without insurance consultation. Areas such as Ashford in Kent, and parts of the Milton Keynes/South

64 “ASCCUE” (Adaptation Strategies for Climate Change in the Urban Environment) This research project, led by the Town and Country Planning Association, aims to understand the consequences of climate change on towns and cities, and to develop adaptation strategies through planning and urban design. The research team is using two case studies to investigate climate impacts on the built environment, human comfort and urban green space at the neighbourhood level. 65 ABI statement of principles on the provision of flood insurance, issued on 11 November 2005 41

Midlands and London-Stansted-Cambridge-Peterborough corridors, are on river floodplains and thus exposed to inland flooding risk.  Thames Gateway and Olympic Village are exposed to coastal flooding too, and in addition very high urban densities are proposed, up to 200 dwellings per hectare.  Many other new homes in England are being built in flood risk locations, often against the advice of the Environment Agency. There are already 2 million properties currently at a high risk of flooding in the UK, of which 130,000 are businesses.

The demand for new housing is good news for property developers. The UK’s biggest house builder claims to build over 16,000 homes a year on more than 400 sites. Its 2005 revenue was over £2billion and its profit before tax was nearly £500m.  Just four UK property developers earned a total profit last year between them of more than £1.6billion  The government plans to spend only £570m on flood defences in England this year and this spending plan was significantly cut this summer.

Steps that the insurance industry could take:

It could be argued that those who choose to live in a floodplain or low lying coastal area should be aware of the hazard. In 1817, the Governor General of Australia66 said: “…when the too fatal Experience of Years has shewn the Sufferers the inevitable Consequence of their wilful and wayward Habit of placing their Residences and Stock Yards within the reach of the Floods… the Compassion excited by their misfortunes is mingled with Sentiments of Astonishment and Surprize that any People could be found so totally insensible to their true Interests, as the Settlers have in this instance proved themselves.”

The inevitability of river or coastal flood damage in such areas is recognised by the insurance industry in both Australia and Canada, where it is impossible to obtain domestic flood insurance against river or coastal flood67. Flood cover is limited to flooding from drains and sewers on the grounds that these could happen anywhere. Indeed in the province of Ontario, the government has made it illegal to buy or sell property in areas where the flood risk exceeds the 250 year return period. If you want to sell your home or business in such areas the government will buy the property and demolish it68. In the long run this has worked out to be a much cheaper solution than building flood defences. Almost immediately after the 1997 flood in Grand Forks, North Dakota, USA. the city identified the properties damaged by the flood, and began to purchase them and demolish them69. Around 100 were demolished before the official purchase had been completed, in order to prevent them being re-occupied.

In England as more and more new properties are built in the floodplain, the “Ontario solution” or the “Grand Forks solution” will be harder to achieve, but restrictions on insurance cover everywhere in England to exclude river and coastal flood altogether will look increasingly attractive to the insurance industry. In the meantime, insurers could consider the following actions: l  Identify and publicise designated flood hazard areas for which no new insurance will be offered regardless of flood defences unless the buildings are constructed to

66 General Orders issued by the Governor General of Australia, Lachlan Macquarie, in 1817 after serious flooding of the Nepean and Hawkesbury rivers 67 Except in the Northern Territories of Australia where there is a government scheme to encourage settlers. 68 Brick, J., and Goldt, R., 2001 “City of London Flood Plain Management”. Upper Thames River Conservation Authority, London, Ontario, Canada 69 Pepper, A., Stonecipher, C., and Vein, K. A. (2002) “Flood management: lessons from a US city.” Municipal Engineer, 151, pp 295-304.

special flood proof standards set out by the insurance industry. For example apartments where the ground floor is used only for car parking not habitation, and where the maximum density does not exceed 30 dwellings per hectare.  Existing properties in such areas could be insured only on a “resilient reinstatement” basis at appropriate premium rates so that after a flood, the property is either bought by the insurer for demolition, or reinstated in a more resilient way, ready for the next flood.

Hazard In the previous section there was discussion about the results of a government sponsored research project called “Foresight” which has found70 that over the next 100 years, if current levels of expenditure and approaches to flood management remain unchanged:  river and coastal flood risk could increase between two and 20 times,  risk of flooding from rainfall could increase between three and six times,  annual economic damage71 could increase from £1bn to between £5.5bn and £42bn by the 2080s, if drainage floods are included, depending on the scenario, and  the number of people at high risk of river and coastal flooding could increase from 1.6 million today, to between 2.3 and 3.6 million by the 2080s.

If exposure is increasing, one possible way to reduce the risk is by managing the hazard. In England the approach is to build structural flood defences such as walls, relief rivers and reservoirs. Environmental regulations72 in England, Wales and N. Ireland limit the adaptation of rivers and lakes to store the increased rainfall predicted with climate change.

More sustainable solutions are being used in other countries such as Japan, Canada and Scotland. Insurers have already given active support and advice on sustainable solutions in Scotland which is experimenting very successfully with “sustainable flood management” solutions73.  Under pressure from WWF and the insurance industry, the Scottish Parliament transposed EU environmental regulations subject to the over riding requirement to ensure sustainable flood management74.  New “land management contracts” under the EU’s common agricultural policy create the potential for farmers to be paid for storing flood water and some techniques are being demonstrated by the very successful River Devon project funded by WWF, with other projects in the offing.

Vulnerability

70 Evans, E., Ashley, R., Hall, J., Penning-Rowsell, E., Saul, A., Sayers, P., Thorne, C. and Watkinson, A. 2004. “Foresight. Future Flooding. Scientific Summary: Volume I Future risks and their drivers.” Office of Science and Technology, London.

71 Economic damage is not the same as the costs that insurers face. Domestic contents are usually insured on a “new for old” basis, for example. Data from the National Flood Insurance Claims Database, shows that insurance claims costs can be up to 2.5 times bigger than economic losses..

72 Statutory Instrument 2003 no. 3242 -The Water Environment (Water Framework Directive) (England and Wales) Regulations 2003 and the Water Environment (Water Framework Directive 2000/60/EC) Regulations (Northern Ireland) 2003.

73 Werritty, A., August 2006. “Sustainable flood management: oxymoron or new paradigm?” Area (2006) 38.1, 16–23

74 Water Environment and Water Services (Scotland) Act 2003. 43

Much is being made of the move towards so called “Sustainable Building”. In practice this often simply means better heat insulation, which can cause problems in drying out or repairing flooded or storm damaged buildings. Climate change will produce wetter winters and dryer summers. Drying out after a winter flood takes much longer. On an average July day in south Lancashire, 60 times as much moisture evaporates as on a typical January day75. Perhaps it is not surprising that a winter flood costs insurers double the cost of a summer flood76 and recovery takes much longer. Where a building is well insulated it may have to be demolished altogether because the insulation may never dry out properly, for example in cavity walls or under the floor.

Sustainable buildings should be designed to better withstand storms and floods, in other words should be more resilient. There seems little point in insulating a house if it is going to be destroyed by windstorm or flood in the next few years.  UK building regulations are amongst the weakest in Europe,  Insurance statistics show that buildings constructed after 1971 are the most likely to be damaged in a windstorm77, although more research is needed.  Government has not listened enough and has not taken adequate steps to ensure that buildings are more resilient. Just as the planning community has a role to play in managing exposure, architects have a vital role to play in designing buildings which are not only well insulated, have high standards of thermal comfort in hot weather (without needing air conditioning), but above all, are resilient to floods and storms. These aspects are just not taught in architectural schools where form still reigns over performance and until recently78 there were virtually no text books on the subject.

As house prices increase there will be more demand for 50 or 100 year or “intergenerational” interest only mortgages, but if new buildings are destined to last for only 30 or 40 years as building standards continue to ignore climate change, such mortgages will become high risk. There is a simple solution: insurers could work with other financial institutions to develop their own building standards as they have in Australia, where these tougher standards for some types of buildings are contained in a “Blue Book”. If a new building does not comply with the Blue Book then insurers do not insure it and mortgage lenders do not grant mortgages on it79. As a result, Australian builders now work to the Blue Book standards. Government still publish their own standards but no one pays any attention to them. Repairs of flood and storm damage could also be made subject to blue book standards. There is not yet the will to do this in the UK, but a series of major windstorms in the South of England could change the position dramatically. The two 1990 windstorms in England produced 3 million claims and the three windstorms in France in December 1999 cost the insurance industry €4,500m.

Awareness, Avoidance, Assistance and Alleviation

In Scotland the government strategy is the four ”A”s, of Awareness, Avoidance, Assistance and Alleviation, with Alleviation being seen as very much a last resort.

Insurers could follow this example, by actively working to  Raise awareness, especially amongst SMEs. AXA has already published guidance for small businesses on the need for continuity plans and is now publishing a new booklet on risk management for SMEs. .

75 Eden, P., 2005 “Change in the Weather. Weather extremes and the British Climate” Continuum, London 76 National Flood Insurance Claims Database. 77 Mootoosamy, V.K.S, and Baker, M.J., 1998 "Wind Damage to Buildings in the United Kingdom" University of Aberdeen, Department of Engineering. Published by the Loss Prevention Council, Paper LPR 8: 1998 Watford. (ISBN 0 902167 49-9). 78 Roaf, S. Crichton, D., and Nicol, F., 2005 “Adapting Buildings and Cities for Climate Change” Architectural Press, Oxford. ISBN 0 75065 9114. 79 Llwellyn, R.,(undated) “Structural upgrading for older houses.”. (a copy of the “Blue Book” is reproduced in this series of handbooks produced by the Insurance Council of Australia and Standards Australia.) 44

 Help SMEs to avoid the risk by encouraging them to arrange adequate levels of insurance, especially for business interruption and encouraging them to locate in safer areas through the insurance premium mechanism.  Assisting SMEs with streamlined claims handling services and advice.  Encourage Alleviation in the form of flood management. This must be controlled by government or its agencies. However, insurers could encourage more sustainable flood management (as they already do in Scotland) by advising local authorities on best practice. Insurers could also encourage farmers and landowners to become involved in flood storage land management contracts.

One of the most positive achievements of the insurance industry has been the dialogue with many local councils since 1995. Officials from almost all Scottish local authorities have requested and benefited directly from free insurance industry advice, research, and information on best practice in areas such as planning, sustainable drainage, climate change, building standards, and sustainable flood management. The residents and businesses in these local authority areas that follow insurance advice receive sympathetic insurance treatment from some insurers that reflect the more responsible attitudes of their local authority. As time goes by it is hoped that more insurers will come to discover that some local authorities are acting more responsibly than others and will underwrite risks accordingly. In this way, prudent local authorities would be able to reduce the impact of insurance blight in their areas. It is to be hoped that if the insurance industry decides to apply a general exclusion of river and coastal flood, that this will not apply to buildings in areas where the local authority has followed insurance advice.

Planners and architects The key to adaptation lies with planners, architects and insurers. It almost goes without saying that building in flood hazard areas is going to lead to problems. Any benefits seem restricted to the shareholders of property developers. Yet it still goes on. Insurers could stop developments for sale to private individuals virtually overnight if they wanted to by simply refusing to provide any insurance on a new property in a flood hazard area, thus making it impossible to raise a mortgage on the property, which in turn would prevent it from being sold. The insurance industry is already well down this road and does not have to go far to take this final step. Soon it may have to. However this would not stop housing associations from building homes for social rental in flood hazard areas, leading to even more deprived people living in the danger zone (see the social exclusion section below).

This is the Thames River in the centre of London, Ontario and illustrates the “Ontario Solution”. New building in the floodplain has been banned since Hurricane Hazel in 1954. Existing properties are left undefended and can only be sold to the local council which will pay market price and then demolish the property and return the land to parkland and trees. A 60 year old defence is still standing on the left bank but is not maintained and will be allowed to collapse in the next flood. The picture illustrates the contrast between high maintenance hard engineering solutions and sustainable flood management. Most properties at risk have now gone, people live in safer areas on high ground, and London is known as the “Forest City”. Photo; © Crichton

************************** In the meantime as insurance for existing properties in flood hazard areas becomes more expensive, there could be growing social pressures for the “Ontario Solution”80 where the government discovers it is cheaper and more sustainable to buy up property and demolish it than to build and maintain flood defences. It is certainly safer and is already happening in Elgin, which is one of the study areas for this report.

“I feel they are helping now, buying up properties in *** Road and that to pull the road back and flood it for the planners. Yes, they are buying my place and they are buying *** in the corner.”

Architects Architects are still being trained in the artistic aspects of their profession, but perhaps this needs re thinking.

80 Brick, J., and Goldt, R., 2001 “City of London Flood Plain Management”. Upper Thames River Conservation Authority, London, Ontario, Canada 46

In 2005, government published a policy paper81 on architecture without any public consultation. This government paper had no mention of the need for energy saving, ecological issues, the need for resilience against flood or storms, or the problems of indoor air quality and thermal comfort in a warmer climate (or possibly a much colder climate in Britain if the Gulf Stream shuts down) and only a passing token reference to climate change.

Many modern buildings exemplify the fact that some architects may have not grasped the significance of projected climate change impacts. A glass frontage acts as a greenhouse in the summer. Such buildings are usually dependent on air conditioning for thermal comfort, thus increasing emissions. New buildings should have smaller, opening windows with external sun shade slats, which can also offer protection in storms. The roof may be shaped like a sail which makes it vulnerable to being blown off in a windstorm. In some new buildings the roof has to be held down by wire ropes.

Insurers are in a position to influence architects through their professional indemnity insurance and investment management decisions.

Social Exclusion issues If small shopkeepers and local businesses are forced to close and lay off staff because they can no longer afford their own insurance due to flood hazards, this could have a follow on impact on social deprivation. It seems clear that local small businesses can provide a particularly valuable service in times of flood in looking after vulnerable members of the community. The insurance industry is very much aware of social exclusion issues. Groups such as the elderly, those less mobile, and those less affluent are particularly vulnerable to the effects of flooding82. Members of the latter group are also less likely to be insured and to suffer the most from flood damage. Insurance industry research83 highlights the fact that three million households84 in social housing have no contents insurance, yet are twice as likely to be burgled as in privately-owned properties. In 1995, 55% of council house tenants in England had no contents insurance. By 2004, this had worsened to 61%. In Scotland a Parliamentary Question in January 2006 revealed that the Scottish figure had worsened from 42% to 43% despite a £500,000 promotion campaign by the Scottish Executive. The insurance industry is conscious of the need to protect disadvantaged sections of the community and is very aware of the problems of social and economic deprivation. It provides low cost insurance payable in weekly or fortnightly instalments for tenants in social rented sector housing85. Payments are often collected with rent. There are special rates for pensioners and in some schemes a pensioner can get household

81 2005. “Scottish Planning Policy SPP 20 Role of Architecture and Design Scotland” Scottish Executive, Edinburgh ISSN 1741 1203. 82 Institute of Public Policy Research, 2005. Commission on Sustainable Development in the South East 83 Demos and Toynbee Hall, 2005. “Widening the safety net – learning the lessons of insurance with rent schemes” This report was published on 12th December 2005, and was sponsored by Royal and Sun Alliance Insurance. 84 UK Housing Review 2004/05, published by the Chartered Institute of Housing and the Council of Mortgage Lenders, 2003-2004 Expenditure and Food Survey, Office of National Statistics 85 John Hood, William Stein, and Claire McCann. Glasgow Caledonian University 2005 “Insurance with rent schemes: an empirical study of market provision and consumer demand” Geneva papers on risk and insurance, issues and practice. Vol. 30 no 2 (Apr 2005), p [223]-243 47 contents insurance for around £1 per week. The insurance industry is making a substantial contribution to social inclusion through such schemes, but there are problems with the take up rates. Schemes were administered by councils but as ownership of social housing is transferred to larger numbers of small housing associations which are often less concerned about administering and promoting insurance, the schemes are becoming fragmented and take up rates are already suffering and likely to suffer even more.

A separate university research project is currently under way on the effect of flood impacts on social inclusion and the results will be interesting. In general it could be argued that insurers have a special duty of care when setting up schemes for socially disadvantaged people not to cut corners on the very cover they need the most. On the other hand, given the very high flood hazard for some of the areas where there is social housing, it is probable that to include flood cover might make insurance unaffordable.

The Insurance Template

Insurers have made great progress in helping to reduce flood risks in Scotland, by quietly providing advice and assistance for the last ten years directly to local government where the real planning decisions are made. 98% of Scotland‟s population is now represented by local authorities who obtain free independent advice directly from an insurance expert on such issues as planning, best practice on flood management schemes, and drainage schemes. In these areas, most local councils understand the issues and refuse to allow new building in flood hazard areas where the risk exceeds an insurance template86. In return, some insurers deal more sympathetically with properties in those council areas because they know the risk will be well managed. Property developers have disposed of their floodplain land-banks and accept the situation because there is now a “level playing field” between councils.

Table: the “Insurance Template”87

Extract from the residential property section of the “insurance template”.

Type of housing Standard of protection

Return period Annual probability

Sheltered housing and homes for the disabled and elderly 1,000 years 0.10%

Children's homes, boarding schools, hotels, hostels 750 years 0.15%

Basements used for accommodation 750 years 0.15%

Single storey without escape skylights 500 years 0.20%

Ground floor flats 500 years 0.20%

“Flashy” catchments (little or no flood warning available) 500 years 0.20%

Single storey with escape skylights 300 years 0.33%

Caravans for seasonal occupancy only, provided adequate 50 years 2.00%

86 Tavendale A and Black A R (2003) Planning Practice under NPPG7: Planning and Flooding, Scottish Planning and Environmental Law, 95, 11-13. 87 The insurance template is © Crichton 1998. 48

warning notices and evacuation systems are in place

All other residential property 200 years 0.50%

The insurance industry has been advising almost every council in Scotland now for several years with the main exception of Moray which refuses help. The county town in Moray is Elgin and it has suffered serious floods ten times in the last 50 years, (see appendix 2) which is why it was selected for study in this report.

Small businesses in Elgin seem to be have a perception that the council could do more to prevent the flooding they have suffered judging by the comments in the focus groups.

“…does anyone actually blame anyone in particular? Moray District Council. Because they have had plenty of chances and nobody seems to be doing a thing. You build all this new housing in risk areas from day one and then they wonder why they bloody flood! Well I think that is stupid, but most council people are stupid and that‟s why they work for the council. The council were no help at all, it was basically „it's your problem get on with it‟.”

Moray is the only flood hazard area of Scotland where the council not only does not accept insurance industry advice they do not comply with the relevant Scottish Executive policy on planning88 and other duties.

The Audit Commission Scotland carried out an audit of Moray Council89 which concluded: “The Moray Council has a very long way to go to respond to its statutory duties on Best Value. Core aspects, such as performance management, challenging reviews, and scrutiny have remained undeveloped for many years. Over the last year and a half, however, there has been a change in leadership within the council and a clear recognition that it needs to modernise the way in which it manages and delivers services to the public.”

This is relatively strong language for the Audit Commission. The comments made in the focus groups of businesses in Elgin were dominated by stories about alleged activities of Moray Council and this has produced some bias in the results. Certainly within the focus group samples there was clearly a lack of confidence in the local council and no-one had a good word to say for it. “…the amount of grass that is growing out of the drains,- they are not cleaned… If they worked for a company they would be sacked.”

It is to be hoped that the Audit Commission‟s Improvement Plan for the council will have a beneficial effect. Meantime the insurance industry might want to consider whether it has a role to play in giving special help and advice to small businesses in this area in view of the exceptional circumstances.

88 Scottish Planning Policy 7: Planning and Flooding (SPP 7). Scottish Executive, 2004 89 Audit Commission Scotland, February 2006. “Moray Council” Audit Scotland, Edinburgh ISBN 1905634 03 X 49

Land use planning Fortunately Moray seems to be the exception that proves the rule in Scotland. The general change in local government planning following insurance involvement is remarkable and has subsequently been reflected in national planning policy for Scotland. This locally driven approach where the situation is explained to the local planners and property developers to get their “buy in” to the problems and solutions seems to be the way ahead. In England the insurance industry has tried a different approach by only working with central government to try to influence planning policy and flood defence spending. The results have been disappointing, and following excellent planning guidance from the Welsh Assembly90 and N. Ireland91, which are basically in line with the Scottish Policy, England is now the only part of the UK where government‟s planning policy still allows new development in flood hazard areas often against the advice of their own Environment Agency. The Environment, Food and Rural Affairs Committee in England is concerned that the advice of the Environment Agency is not being fully taken into account when it comes to allowing house building on land at risk of flooding92. “…all these new estates built outside on the flood plain they should never have been given planning permission because we have plenty surrounding land around Carlisle that‟s within the planning remit that could be built on.”

The Agency estimates that over five million people and two million homes and businesses are currently at risk of flooding in England and Wales, with assets valued at £250 billion. The Agency also told the Committee that flood risk could increase “as much as 20 fold in the future” due to the effects of climate change. In 2004, at least 693 houses were built in flood risk areas against Agency advice, and it is estimated that the Agency is consulted in fewer than 60 per cent of applications where there is a risk of flooding. The Committee concludes the Government needs to increase the Agency‟s funding in the area of flood defence work to £1 billion per year in the long term. This is no doubt what the Environment Agency wanted to hear, but it is by no means a long term sustainable solution. Society has to work with Nature not against it.

Current land use planning rules as set out by the then Office of the Deputy Prime Minister are basically a licence for property developers to print money. Several of them make profits near or in excess of the total annual government budget for flood defence spending in England, thanks to their freedom to build on cheap flood plain land regardless of the consequences for human misery.

A Focus Group conversation… “You see, you have to understand, what was unfair as well was, when these people were put out of their house on the day of the flood, they were never allowed back into

90 National Assembly For Wales (1998). Technical Advice Note (Wales) 15 Development and Flood Risk. National Assembly for Wales, Cardiff. 91 Dept of Environment N. Ireland, June 2006 PPS 15 „Planning and Flood Risk‟ 92 The Environment, Food and Rural Affairs Committee Report on the Environment Agency. UK Parliament, May 2006.

50 their house. And half their stuff was emptied by the Council and prized possessions and everything was dumped. - And stuff that had never been touched by the water. Once they were flooded, they put them into certain places …temporary accommodation. And never let these people back in to their house after that day, to collect their stuff. -and half the stuff, they are pensioners and everything. And they never stored… They said it was stored.”

Government seem to take insurance availability for granted and seem to be reluctant to seek advice from insurance experts. There have been three major Parliamentary Inquiries93 into climate change issues (1999, 2002, and 2005) and in each case only one insurance expert (the author) has been invited to give evidence.

UK small businesses may not know much about climate change, but they do know about the need for insurance, and they increasingly know about one of the most damaging impacts of climate change, namely flood, either from bitter experience or from increased insurance premiums (see the next section).

The position is going to get a lot worse, and not just because of climate change. There are a number of other factors operating, here are just five:

EU Water Framework Directive94 This has been transposed into law in England, Wales and N. Ireland without change and without consultation with the insurance industry. The Directive has good intentions, to safeguard or improve the ecological quality of rivers and lakes and to prevent them being “modified”. The problem is that Nature may on occasion need some help in coping with the future major changes in rainfall patterns predicted by climate change scientists, otherwise rivers and lakes will overflow and cause flooding. The potential was illustrated in January 2005 when a prolonged rainstorm over the Lake District was followed by flooding in Carlisle. Agricultural policies resulting in grants for drainage of wetland areas have not helped and small businesses are aware of this: “We‟ve got to look at other things as well where you get the natural drainage you‟ve got the agricultural land where they are doing the drainage and wetlands which have been removed they would have been a natural sponge.”

The legislation, at least in England, seems to be having the consequence of inhibiting the implementation of more cost effective and sustainable non structural solutions to

93 Scottish Parliament Environment and Rural Development Committee Inquiry into climate change 2005. Scottish Parliament, Edinburgh. Written evidence available from: http://www.scottish.parliament.uk/business/committees/environment/papers-05/rap05-06.pdf#page=10 Transcript of oral evidence available from: http://www.scottish.parliament.uk/business/committees/environment/or-05/ra05-0602.htm#Col1653 House of Commons International Development Committee Inquiry into Global Climate Change and Sustainable Development.” House of Commons HC 519-II, pp. Ev. 150 –Ev. 154. July 2002. UK Climate Change Programme. Environment, Transport, and Regional Affairs Committee of the House of Commons. "Memoranda relating to the inquiry submitted to the Committee" (HMSO; HC171-11) January 1999.

94 Water Framework Directive, 2000. Directive 2000/60/EC of the European Parliament and of the Council of 23 October 2000. 51 flood problems, thus in Carlisle it is proposed to build flood walls through the centre of one of England‟s most historic and beautiful cities rather than increase storage capacity in the lakes. There have been similar proposals in Elgin for ten years.

In Scotland, thanks to the sustained lobbying efforts by WWF and 31 other environmental non government organisations working together with close co- operation and assistance from the insurance industry, the legislation95 transposing the Directive is very different and is subject to the requirement that: „„Scottish Ministers, SEPA and the responsible authorities to work in an integrated fashion and co-operate with each other to promote sustainable flood management”.

Government in Scotland now has a statutory duty to promote sustainable flood management and that in effect means that “ecological quality” must include the ability to cope with extreme rainfall or drought in changing climate conditions.

EU Solvency II Directive This is expected to be adopted in 2007 and implemented in 2010. It will require insurers to manage their exposures even more carefully and this could well result in even tighter limits on insurance availability and affordability in flood hazard areas, even for the social rented sector. Insurers‟ attitudes will increasingly be driven by financial regulation. The first Solvency Directive96 of the European Commission has established capital requirements based on risk with a requirement to hold increased capital for higher-risk liability business and this is due to be strengthened by the Solvency II Framework Directive. The Commission has already set out the policy principles and guidelines for the development of the Solvency II regime and in the UK the Financial Services Authority (FSA) which regulates the operation of UK insurance companies, requires97 that “… a firm must at all times maintain overall financial resources…to ensure that there is no significant risk that its liabilities cannot be met as they fall due.” “Insurers are to identify and understand the risks in their business, identify an appropriate control environment to manage those risks and monitor the enforcement of the controls”. This could pose major problems for some government policy such as the developments at Thames Gateway and the Olympic Village. The insurance industry has already pointed out the flood hazards of the Thames Gateway, and the government is now well aware of these98: “It is estimated in the Thames Gateway where more than 90% of the land for development lies in designated flood risk areas, a sequential approach that allocates housing to the lowest risk areas could reduce potential flood risk losses by up to 52%.” (Section 6 [35] )

“So that‟s all right then.” As one commentator ironically put it.

95 Water Environment and Water Services (Scotland) Act, 2003. 96 Directive 2002/13/EC of the European Parliament and of the Council Amending Council Directive 73/239/EEC as regards the Solvency Margin Requirements for Non-Life Insurance Undertakings 97 Paragraph 1.2.22R of Financial Services Authority (FSA), 2006. “Integrated Prudential Sourcebook” FSA , London. 98 ODPM, 2005. “Consultation On Planning Policy Statement 25: Development And Flood Risk.”

The real threat to insurance availability stems from Solvency II. Normal “high” housing density in the South of England is 30 dwellings per hectare; in parts of the Thames Gateway a housing density of 200 dwellings per hectare is proposed with a further 35,000 dwellings at the Olympic Village site, also in a floodplain. Whether the government regulator will be prepared to allow insurers to accept such a high concentration of flood hazard exposure remains to be seen. Even if they do, reinsurers are unlikely to be satisfied. Even if they are, credit rating agencies such as Standard and Poor‟s with their new catastrophe models may be concerned and may downgrade insurers with too much exposure.

Water Industry Act 1991 Section 106 of this Act requires water companies to accept connections to their sewer systems from new buildings, even if the sewer system is at full capacity. Property developers like this Act, it saves them money, but as a result of it many sewage systems in England are overloaded, and surcharge during flood events.

In Scotland, there is a different legal system and property developers have learned to accept that no new development is allowed unless the drainage and sewer system already has spare capacity. Sometimes developers have even had to resort to actually paying for new sewers themselves in order to obtain planning permission.

Building standards. Recent changes to building standards are preoccupied with matters such as disabled access and energy saving. However, there has been a 27.8% reduction in the annual average number of days with ground frost in Scotland99 since 1961, and often the design of insulation used increases the claims cost after a flood. As for disabled access, the lack of doorsteps can increase the amount of flood water which can enter the building. (Developers often lower the floor level rather than build ramps in order to save money and local authority Building Control officers never check these things.) The insurance industry has been working together in the UK since 1995 to collect data on flood costs for different parts of different types of buildings and now has the biggest flood damage database in the world. Analyses from this privately funded database have been offered free of charge to the government, but there seems to be little progress in making building standards more resilient to flood and windstorm damage. Indeed insurance research100 has shown that modern buildings are now less resilient to windstorm than older ones. In Australia, insurers and banks have produced their own set of building standards101 called the “blue book” and will not lend or insure if these standards are not met. As a result government building standards have become irrelevant for some types of property. The Blue Book solution is an option which should certainly be explored urgently in the UK, not only for producing more resilient new buildings but also for reinstating

99 Barnett, C. Hossell, J., Perry, M., Procter, C., and Hughes, G., 2006. “A handbook of climate trends across Scotland” SNIFFER project CC03, Scotland and Northern Ireland Forum for Environmental Research, 62pp. Scottish Executive, Edinburgh 100 Mootoosamy, V.K.S, and Baker, M.J., 1998 "Wind Damage to Buildings in the United Kingdom" University of Aberdeen, Department of Engineering. Published by the Loss Prevention Council, Paper LPR 8: 1998 Watford. (ISBN 0 902167 49-9). 101 Llwellyn, R.,(undated) “Structural upgrading for older houses.”. (a copy of the “Blue Book” is reproduced in this series of handbooks produced by the Insurance Council of Australia and Standards Australia.) 53 buildings to a more resilient standard after a flood or storm. It may become essential to insurers to help them to satisfy Solvency II. A survey of insurers102 has shown that they would support compulsory resilient reinstatement provided there is a level playing field. In the long run this would make UK building stock more resilient and ready to withstand the impacts of future climate change.

Sustainable Drainage Systems

This shows a “detention basin” for storing surface water at the biggest SUDS demonstration site in the UK (Dunfermline) until the water can soak into groundwater. The basin is meant to be dry for most of the time, but this one is next door to a supermarket and is a magnet for shopping trolleys and rubbish which have blocked the outlet. This photo illustrates the need for frequent cleaning to avoid the risk of overflows causing flooding. Following insurance representations to the council, the supermarket has now agreed to take over the maintenance of this basin. Photo; © Crichton

********************

Often called “SUDS”, this is the practice of using ground features to return rainfall run off into groundwater within a developed site so that the overall site has a neutral effect on run off into drains and watercourses. The idea has become very popular with property developers, for two very different reasons: - In England, many councils do not understand SUDS and seem to think of it as a cheap flood alleviation measure which justifies allowing more building in

102 Clark, M., Priest, S. J., Treby, E. J., Crichton, D., 2002 “Insurance and UK Floods: a strategic reassessment.” A Research Report for TSUNAMI (now the “Risk Group”). University of Southampton, Southampton. 54

floodplains. In fact, use of SUDS in a floodplain can increase the flood hazard. - In Scotland, in sites where surface water drains are near full capacity, SUDS can enable development because there is no need for connection to the drains, only to the sewers. Retrofitting SUDS downstream can create more capacity in combined sewers to allow for the new development without the developer having to pay for pipes and sewage treatment. A survey of insurance companies103 has found that they are very concerned that these systems could increase the flood hazard and much time has been devoted to advising Scottish councils on the correct design of such systems along with other flood insurance advice.

Advice and Warnings The Environment Agency (Scottish Environment Protection Agency in Scotland) has a role to play in giving advice and flood warnings. After the autumn 2000 floods, the Federation of Small Businesses carried out a survey104 of members who had been flooded. This found that the most commonly used sources of advice during the floods were the insurance companies (24%), the Environment Agency (17%) and the local authority (13%). The highest levels of satisfaction with the advice given, was the advice from insurance companies. The highest dissatisfaction with advice given was the advice from the Environment Agency and local authorities. Since that time, both environment agencies have made great efforts to raise flood awareness and develop flood warning dissemination systems. They may have some way to go as far as communicating with small businesses is concerned however as the AXA survey described earlier found.

Not all parts of Scotland are covered by flood warning schemes. If a local authority asks for a scheme for its residents however this is sympathetically considered and if a case can be made for a need for such a warning scheme it is readily granted. The big problem is disseminating warnings. In many parts of Scotland this is still done by the police, but not in England where telephone warnings tend to be used instead. Warning dissemination systems in Scotland are still being developed. In the meantime the insurance industry could assist by using their 24 hour help lines and direct selling operators proactively to warn customers and offer assistance. Such warnings might be taken more seriously than automatic calls.

Part D: The Future Role of the Insurance Industry

Everyone needs insurance. In the developed world, everyone understands insurance (or thinks they do) and takes it for granted. But in the UK, there is a group of people who are unable to buy insurance at any price. These people are mainly the owners of small businesses in flood hazard areas. There is still a perception that insurers have some form of social duty to provide insurance cover even where the flood hazard is so high that damage is inevitable.

103 The results of this survey appear in Crichton, D. in press “Floods and SUDS; some frequently asked questions” 104 Barter, A.,2002 “Autumn 2000 Flood Survey” Federation of Small Businesses (South East). Polegate, England 55

Thomas Jefferson, the author of the USA‟s Declaration of Independence, said “The care of human life and happiness, and not their destruction, is the first and only legitimate object of good government”105. Many countries in addition to the USA have the ethos of “solidarity” in which the government helps citizens who suffer from natural and other disasters. This ethos is not so deep rooted in Britain; indeed a government minister106 went so far as to say in connection with government compensation for flood damage: “That would not be a wise or sensible position for any government to take.”

In the absence of government compensation, one of the results is that there is a public perception that insurers have a “social duty” to provide cheap cover for everyone107.

There is certainly a high take up of private insurance in Britain108, one of the highest in the world. This has meant that the insurers are financially strong and technically sophisticated in managing flood risks.

But it must be emphasised that the insurance industry in the UK has no responsibility legally or morally to provide cover. Insurers have to operate on a commercial basis like any other business. They are answerable to shareholders, employees and the regulator to run their business safely and at a profit. They have made every effort within these constraints to provide and maintain insurance cover especially to disadvantaged sections of society, and have shown great social responsibility. However when the probability of loss becomes high enough, it is time for them to hand over the risk to the bookmakers. In 2001, Ladbrokes offered odds of 7 to 2 for a flood in Elgin in 2002. For a £2 stake you could win £7. This is the equivalent of an annual premium of £20,000 for a £90,000 sum insured. Ladbrokes knew what they were doing with those odds but as events turned out it would have been a good bet. Elgin flooded again in 2002.

Exposure issues Concerns expressed by the insurance industry about climate change and UK flooding have attracted ill informed comments that insurers are exaggerating the problem. The cost of flooding claims for the insurance industry is often not fully appreciated. Data from the National Flood Insurance Claims Database109 shows that the median claim size during the 1990s for domestic buildings was £10,000 for a summer flood and £20,000 for a winter flood, with a further £1,500 for alternative accommodation. Contents losses for a semi detached house in the 1990s ranged from £5,000 to £10,000 depending on the depth of flood (all at 1999 prices). For post 1999 floods, domestic costs are much higher (this is a privately funded database so the current actual figures are still commercially confidential). However for small businesses,

105 Thomas Jefferson‟s speech in 1809 to the citizens of Washington County, Maryland, USA. 106 Nick Raynsford, MP, the then Minister for Planning, emphasised this point in his evidence to the House of Commons Select Committee Inquiry into the autumn 2000 floods. See “The Environment Transport and Regional Affairs Select Committee Report on the Autumn floods in 2000”. Published on 20th December 2000. HMSO, London. 107 Clark, M., Priest, S. J., Treby, E. J., Crichton, D., 2002 “Insurance and UK Floods: a strategic reassessment.” A Research Report for TSUNAMI. University of Southampton, Southampton. 108 While the numbers of owner-occupiers with contents insurance is growing (from 89% in 1995 to 93% in 2004), only 39% of tenants in the social rented sector in England and Wales had contents insurance in 2004. (In Scotland, the figure is now 57%.) Three million low income households are uninsured for contents. 109 Black, A and Evans, S (1999) "Flood damage in the UK: New insights for the insurance industry." University of Dundee. ISBN 0 903674 37 8. Dundee, Scotland. 56 flood claims can be in the region of £500, 000 or even a million, depending on the type of stock and depth and velocity of flood. Business interruption claims are in addition.

A recent survey by Axa showed that  90% of small businesses are “underinsured” for their buildings insurance, in other words their sum insured has not kept pace with the increases in rebuilding costs.  Around a third of small business customers do not have Business Interruption (BI) cover.  The length of business interruption has increased enormously in the last ten years as businesses become more complex, and more are damaged by flooding. The average interruption period has increased from 8 months in 1996 to 14 months in 2005.  The average cost of a business interruption claim from a flood has increased from £22,000 in 2001 to £35,000 in 2005.

In September 2000 a research report110 predicted that major inland floods in England and Wales could cost insurers over £1bn. Critics at the time rubbished the report as over exaggeration, saying that inland floods could not cost anything like that amount. The following month, serious floods over much of England and Wales cost insurers over £1.2bn in claims. Annual flood damages now average £2.3bn per year according to government figures111.

Sandbags and flood defences

The pallet of sandbags “ The council had took a pallet load of sandbags and placed them at the end of the road. Now this particular woman was 92… And so she couldn’t carry them. Well, I say „was 92‟, because she is actually now dead as well. And she couldn‟t carry them and she went up to the man who was standing there and asked „Is there any way you could possibly take a couple of sandbags over to place at my door?‟ And he says, „No, they are there. Help yourself‟. And walked off and left her. And that is my main memory. Something has got to be done about the flooding in Elgin.”

Sandbags are not always readily available. “And the last time - it was about two years ago there was the threat of the flood - they said „contact your local council for sandbags‟, and we did and they were keeping them to protect their (own) property and left everyone else to sort themselves out.”

Sandbags are not ideal, they are heavy, filling them is time consuming, and after a flood, careful disposal is needed because they will probably be contaminated with sewage and attractive to children who want to play in the sand. Also they are not always effective.

110 Entec Ltd, JBA Ltd, Crichton, D, and Salt, J, (October 2000) “Inland Flooding Risks. General Insurance Research Report No 10” Association of British Insurers (ABI), London. 111 Quoted in ABI, July 2006. “A Future for the Floodplains” ABI, London 57

“Sandbags are a waste of time. Why do you think that then? The water can just come through the air vents and up through the floor.”

A range of effective lightweight temporary protection systems is now available112 and are being purchased by a large number of councils for council owned housing around the country. They can reduce losses and give peace of mind. “The city council has installed quite a few of these.”

The focus group members did not have experience of using them however so could not comment.

The biggest temporary flood defence of course is the Thames Barrier.

The Thames Barrier This barrier can be raised (as shown here) to protect central London from storm surges. In recent years it has also been raised during normal high tides to provide storage for downstream flows. The Thames Barrier protects 150km² of London that lies below the high tide level. Overall in London the value of property in the floodplain is around £80 billion113. The Thames Barrier alone protects property worth around £30 billion. In 2003 it was used in a record 14 consecutive tides to help to alleviate fluvial flooding in the Thames catchment, when flows in the Thames reached their third- highest value, a more-severe event than in Autumn 2000 (when it had been closed for

112 Crichton, D. 2004. “Temporary local flood protection in the United Kingdom. - An independent assessment.” A Benfield Hazard Research Centre technical report. Free download from: http://www.benfieldhrc.org/activities/misc_papers/Temporary_local_flood_protection.pdf 113 Parker, D., and Penning-Rowsell, E. (2002), “Disaster Transformation and Management issues in London” Proceedings of the 2002 London‟s Environment and Future (LEAF) conference at University College London. 58 seven consecutive tides). By 2030, due to sea level rise and other factors, it has been estimated that it will need to be closed 30 times a year on average114. Photo; © Crichton

********************

As recently as August 2006 a research paper115 asked: “…what is an appropriate balance between the responsibilities of Government and its agents in the provision of flood protection and the insurance industry in the provision of flood insurance?”

There seems to be a perception that because insurers benefit from flood defences they should contribute to the cost. This would not be practical; in a free market insurers can simply walk away from the risk and insure someone else. In England one government department is responsible for allowing floodplain development knowing that the cost of defending it falls on an entirely different government department so why should it stop as long as it ensures the property developers keep making money? One solution would be for the department which creates the problem to also be responsible for solving it, but perhaps that is too radical a suggestion.

HM Treasury, rightly or wrongly, is blamed for two things: 1. Insisting that cost benefit appraisals are based on a small sample of economic losses from flood, even though the actual insurance losses based on a large sample are usually double that. The justification is complex and it might be argued is designed to keep flood defence spending low. At any rate, the spending rules mean that if a business is flooded and trade moves to another business the total economic loss is zero as far as the Treasury is concerned, so flood defences for businesses are not justified unless it can be shown that the trade would go overseas. 2. Flood defence money can generally only be spent on hard engineering solutions such as walls, rather than the range of non engineering sustainable solutions used elsewhere in the world116, which are often much better value for money117. The Foresight research has shown that engineering solutions alone would cost £52 billion just to manage the additional risks from climate change. This compares with £22 billion when using engineering in concert with a range of non-engineering measures. If the Treasury are innocent of these accusations, perhaps they should say so. At present some of the most cost effective flood management schemes in Scotland are non structural schemes funded by European money, public spirited land owners, and WWF, not UK government. This is because it is claimed that the Treasury will not agree to fund non structural solutions.

114 “The Thames Barrier Flood Defence for London.” Environment Agency, 2001. 115 Howard S. Wheater 2006. “Flood hazard and management: a UK perspective” Philosophical Transactions of the Royal Society A: Mathematical, Physical and Engineering Sciences Volume 364, Number 1845 / August 15, 2006 pp 2135 – 2145 ISSN: 1364-503X (Paper) 1471-2962 (Online) 116 Crichton, D. (2002) “UK and Global Insurance Responses to Flood Hazard.” Water International Vol 27, 1. Pp 119- 131. Illinois, USA 117 Evans, E., and Hall, J., December 2004. “A new climate for flood planning” Ingenia, the Journal of the Royal Academy of Engineering, December 2004.

Insurance availability and affordability

Insurers accept that it is part of UK democratic tradition that local authorities decide on planning matters. It is simply a fact of life that prudence dictates that insurance companies must protect themselves from excessive exposure to losses from flood events. Traditionally insurers could spread such losses by charging higher premiums over the whole portfolio. In effect the premiums from the many in safe areas were paying for the losses of the few in flood hazard areas. However as the numbers in flood hazard areas grow and as insurers develop better flood hazard maps, competitive forces drive down the premium in safe areas so that in hazardous areas the premium must reflect the risk. In a flood hazard area, where cover is available at all it is becoming very expensive, and flood cover even for the social rented sector schemes described above is under threat. But when it comes to insurance availability and affordability, small businesses are prime targets: “90% of the insurance market will refuse insurance on flood areas in Elgin.”

Insurers are generally maintaining cover for existing customers but refusing to quote for new business. “You can‟t move anywhere else because no one else will insure you.”

This research has found that in general, small businesses feel they have been dealt with fairly by insurers (with some exceptions) but are very conscious of big increases in premium and fear for the future if there are any more floods. At least insurers are generally staying loyal to existing customers even if shopping around for a cheaper quote is no longer an option.

There was little sign of any confidence that the authorities would take effective action at least in Elgin. “I think that the council can perhaps be forgiven for not responding to the ‟97 flood. But they can‟t be forgiven for not getting their house in order following the 2002, and it is debatable whether they are moving quickly enough to bring in the measures that they need to…”

The New Economics Foundation has produced a report which advocates reform118 “to develop a conducive policy environment that ensures access to affordable financial services for all, particularly the most disadvantaged” - however they do not specify how insurers can do this in the face of increasing risks and regulation and they do not mention climate change, let alone flood risks, or the actions of local councils.

The insurance industry is therefore caught between the desire to make insurance cover as widely available as possible and future increases in capital requirements set by the Regulator based on risk.

In July 2006, the insurance industry as a whole called for an increase of £200m in government spending on flood defences119 each year in England and Wales alone. They point out that 570,000 homes and businesses in England and Wales face a high

118 John Taylor, Anne-Marie Davies, Andrea Westall, 2004. “Highlighting success the Inner City 100 programme” 32pp , New Economics Foundation, London. ISBN 1 899407 95 2 119 ABI, July 2006. “A Future for the Floodplains” ABI, London. Available from www.abi.org.uk/flooding 60 risk of flooding. This is more than double the government‟s assessment when flood defence spending levels for England and Wales were set in 2002. Scottish Executive research figures indicate that a further 171,000 properties in Scotland are at risk120, making a total of 741,000. Based on national assumptions around 7.5% of these are commercial properties. Defra announced in August 2006 that their spending would be reduced by £200m, much of this will impact flood defence spending.

Resilient Reinstatement Often resilient reinstatement techniques cost no more than normal reinstatement, but where they do the policyholder should have the opportunity to pay the difference and if necessary the insurer should offer low interest loans. In the case of electrical equipment it may be compulsory to locate new wiring and sockets above the flood level and this should not cost any extra. Even if it does these additional costs should be covered as part of the claim. Insurers should bear in mind that if the policyholder is unable to change insurers, resilient reinstatement will benefit both parties in the long term. Details of the most effective resilient reinstatement techniques are available on the internet121. More detailed information can be found in the excellent 2005 CIRIA standards written with guidance from expert builders and insurers122. It is to be hoped that in future floods, insurers and loss adjusters will use these techniques wherever possible. Unfortunately in the past there has been evidence that some loss adjusters have been looking to settle claims as cheaply as possible123, even if it means the next flood will be more costly124. This is short sighted and is something insurers need to address urgently if only to safeguard themselves for future flood claims.

The Pitch Pine Problem “Has anyone heard or experienced themselves about when people have gone in to reinstate things inside the house. For example, a door that was pitch pine125 may then have been flooded and reinstated with something cheaper? I have heard that. Same as pitch pine floors coming up and the cheap rubbish going down. Yes, a lot of the stuff was, especially the wooden floors was good quality stuff and the stuff that these nationals were bringing in was awful really. But there was a number of cases where because they are not standard doors down here where they were

120 Werritty, A, Black, A, Duck, D, Finlinson, B, Thurston, N, Shackley, S and Crichton, D., 2002. “Climate change: flooding occurrences review”. Report to the Scottish Executive Central Research Unit, Edinburgh 121 Crichton, D., (2005) “Flood risk and insurance in England and Wales: are there lessons to be learnt from Scotland?” Technical Paper Number 1, Benfield Hazard Research Centre, University College London. Available for free downloading from www.benfieldhrc.org 122 Garvin, S., Reid, J., Scott, M., Building Research Establishment, East Kilbride, Scotland. 2005 “Standards for the repair of buildings following flooding” Manual C623. 133pp. Construction Industry Research and Information Association (CIRIA), London 123 Crichton, D., 2005 “Towards an integrated approach to managing flood damage.” Journal of Building Research & Information (2005) 33(3), 293–299. Routledge Journals, Abingdon. 124 Building Research Establishment, 2003 “Assessment of the Cost and Effect on Future Claims of Installing Flood Damage Resistant Measures.” Commissioned and published by the Association of British Insurers, London, May 2003. 125 Pitch pine is an attractive close grain knot free wood widely used for joinery 100 years ago and difficult and expensive to obtain today. It recovers very well from flooding if given the chance to dry out properly. 61 actually putting smaller cases in and smaller doors so god knows what they will be like in 10 years time. That's what they want my son to do, he‟s a joiner, he got the contract to do that house. The first time it was quality stuff, the second time they said they weren't going to pay for it, they said „you don't need heavy door, you don't need a pine door, you are only going to get 20 quid‟.”

Fraud and claims exaggeration The focus groups confirmed that this went on in both Carlisle and Elgin, but no more than might be expected. The normal types of fraud after a flood are listed in a 2003 report126 (revised 2005) and it is interesting to see whether there was anything new. The list is repeated below with focus group comments where appropriate.

Bandwagon Effect - Where claimants are tempted to seek higher settlements after talking to other victims, and are jealous of what others obtained, or are unwilling to accept the loss adjuster‟s figures. “I worked on one street and I got the distinct impression that they had had a site meeting cos they were all asking for the same things.”

Profiteering - Where tradesmen inflate their usual rates due to the high demand, or carry out work which is not strictly necessary. Flood claims are particularly prone to this. For example, tradesmen may replace floors, doors and windows despite the fact that they could have been could be cleaned, dried out and re used. Often these new materials are actually more vulnerable to future flood damage. “The skip men had a field day they were rubbing their hands all the stuff that was coming out.”

Sales pressure - Where tradesmen have pressured victims who are desperate for repairs to accept unreasonable estimates or shoddy work, rather than wait. “The vermin were that were coming out trying to make you part with more money. There was loads of fellas after the first few days weren‟t there? Who were all these fellas hanging round with suits and it turns out they are just leeches trying to get money you give them your insurance details they will deal with it and then they will rob you for 20%.” “They were like leeches round all the time you were trying to clear up.”

Exaggeration - Where claimants have exaggerated the amount of damage or the value of the losses. Again this may be done to cover the excess, and the bigger the excess, the more likely it is that claimants will exaggerate the amount of the damage. “They were replacing what was a nylon carpet with an 80% wool some people got money thrown at them in a big lump sum there you are spend it on what you want that‟s to cover everything. So they got to choose.” “It‟s no skin off your nose to sell them something better than they are entitled to so you just put a quote in and you sort of think well its up to the insurance company to reject that and say no.”

126 Crichton, D., (2005) “Flood risk and insurance in England and Wales: are there lessons to be learnt from Scotland?” Technical Paper Number 1, Benfield Hazard Research Centre, University College London. Available for free downloading from www.benfieldhrc.org

Missing salvage - Suspicions can be aroused in cases where damaged contents have not been retained for inspection (perhaps they never existed, or were never owned by the claimant). “There was a lot of stuff was thrown out before the assessors came out.” “Some people were dealing with the loss adjusters then taking their stuff to the next street there was a few Xboxes getting passed around.” “Not only exaggerating claims but claiming for things that were never there because I know when we went on surveys when we went originally we would photograph it.”

Opportunistic Crime - Looting, mugging, assaults, and malicious damage can increase during the aftermath of a natural disaster. “I had three bottle fridges and they are about £500 each and one of them I only had brand new for four months and they actually took them outside and put them on the pavement and they were gone the next morning.” “Yeah there was a lot of robbing going on we were out basically 2 weeks, mates put us up but we moved back in with no electric on because we heard about it.” “Yeah we were out for 9 days but the insurance on the flat would not cover the insurance was not valid if we weren‟t living there so we had to move back in. No phones, there was no electric, pitch black, freezing cold, soaking wet.” “The biggest concern at the start was security when everyone‟s alarms after the first night obviously the batteries and stuff were running down on the alarms and there was a lot of thefts and so a lot of people were concerned with the electric being off the next day to try and sort something out with the alarms and the batteries and stuff like that.” “There was a lot of scavenging, there was a lot going on. There was a lot of looting as well.”

There was a new element in Elgin, namely allegations of theft by council workers. “Yes, it was supposed to be stored… Well surely the council workers were knocking it off weren‟t they? Yes, well they were. Tellies and suites, everything. It was the biggest con.”

Carlisle also had a new element which was allegations of electrical certificates being falsified. “I mean the certificates down that road and down **** Street and outside Carlisle they have got electrical certificates saying its safe and it‟s not. That was a national company employed by insurance companies.”

The FASTER System (Flood and STorm Event Reporting System) was designed to speed up claims handling, standardise data collection, and help to identify fraud and claims exaggeration during a major event127. Extensive field trials proved it to be extremely effective at improving claims handling efficiency and it was recommended

127 Crichton, D., (2005) “Flood risk and insurance in England and Wales: are there lessons to be learnt from Scotland?” Technical Paper Number 1, Benfield Hazard Research Centre, University College London. Available for free downloading from www.benfieldhrc.org 63 by the Loss Prevention Council and in a Chartered Insurance Institute report128 in 2001. Insurance underwriting managers in the industry welcomed it as a way to collect data which could help with premium calculations, but claims managers could not see direct benefits to them at that time and it was shelved. Perhaps it is time to reconsider this system?

Complaints about insurers While satisfaction with insurers was generally very high, there were some isolated cases of problems.

One disturbing finding from the research was to find that one insurer had applied an endorsement to a small business policy to exclude flood and had allegedly not informed the broker or policyholder. The insurance industry is now regulated by the Financial Services Authority and is required to make a substantial improvement in the degree of “contract certainty” that exists between an insurer and the insured by the end of 2006. Trying to exclude “flood” from insurance cover is beset with difficulties owing to the various legal definitions of the word, and this may become even more complex with the new definition under the proposed EU Flood Directive. Insurers are often better to simply refuse to renew cover rather than attempt to provide cover with flood excluded. Where they do they should certainly not be trying to slip an exclusion in without making the intention and implications clear to the policyholder and giving them the opportunity to buy back the cover. The industry has now developed a code of practice to deal with such situations and this came into force in October 2005.

If a small business finds that flood cover has been excluded or policy renewal declined because of flood it may be that the only way they may be able to obtain property insurance, will be to adapt their property to become more flood resistant and resilient. Alternatively they may find it easier to relocate to a safer area. This can result in so-called “flood blight”.

Flood Blight In some of our towns and cities there are already signs of flood blight as small businesses relocate away from flood hazard areas.

The ghost town “Well where we are it is actually like a ghost town I used to look out of my upstairs window in the flat to a garage that was all lit up till midnight when they closed and now I look out on a night and it‟s pitch black. There is nothing. You don‟t even see many people walking on the street like you used to see before because there is a lot of the houses they are either knocking down or they are moving people out they are just empty and no one is living there any more.”

This can be due not only to rising insurance premium but to the disruption of business and additional work caused by floods and cleaning up the damage. Sometimes the blight can be a delayed effect: many small businesses, especially in England, operate

128 Dlugolecki, A. (ed), Agnew, M., Cooper, M., Crichton, D., Kelly, N., Loster, T., Radevsky, R., Salt, J., Viner, D., Walden, J., Walker, T., 2001. “Climate Change and Insurance.” Chartered Insurance Institute Research Report, London 2001 64 from leasehold properties, and a survey129 conducted of businesses after the Autumn 2000 floods identified a number of businesses which intended to relocate when their lease was due for renewal.

Flood blight on commercial premises can have a serious impact on a local community. As well run small businesses are replaced by vacant or scruffy premises, property values nearby are likely to suffer. Small businesses may close or leave the area altogether.

Commercial threats to small businesses Many people are unhappy at the loss of small retail units in their town centres due to the “invasion” of chain store outlets and large shopping centres and supermarkets. Without careful planning, the centres of our towns and cities can suffer from commercial blight. New Economics Foundation research was claimed to demonstrate that local procurement could increase the local economic value of spending by 400 per cent. The results of the research130 made it clear that buying from local companies keeps money local for longer. “Local suppliers in Northumberland re-spent on average 76 per cent of their income with local people and businesses, while suppliers from outside Northumberland spent only 36 per cent in the area.”

“The bulk of the money went out of town” “…one of the saddest things about the floods is the money that (the flood) generated, there was millions generated I mean everyone here done quite well out of it but the bulk of the money went out of town one of the saddest things about the floods is the money that generated, there was millions generated I mean everyone here done quite well out of it but the bulk of the money went out of town

The focus groups showed some resentment against insurers for not using local businesses to a greater extent in flood repairs or replacement of furnishings and this is something which could be examined. “The nationals had moved in and whether there was some alliance with the adjusters and the nationals I don‟t think there was as much (work) handed out to local builders.”

However local businesses often do not have the capacity to respond to the extra work generated from a major event, especially if their own premises have been damaged and the homes of their employees.

Health and Human Impacts As the 40th anniversary of the Aberfan tragedy approaches, it is perhaps timely to bear in mind the human cost of flooding, which is often not taken into account sufficiently - perhaps because it is so hard to put a price on human suffering in economic terms – but it is very real nevertheless, and owners of small businesses often suffer more than most.

129 Barter, A.,2002 “Autumn 2000 Flood Survey” Federation of Small Businesses (South East). Polegate, England. 130 Andrew Simms, Petra Kjell and Ruth Potts, 2004. “Clone Town Britain” Results of a survey by the New Economics Foundation. 44pp. ISBN 1 899407 98 7

“It's dreadful, but you just have to get on with it. I found it really stressful at the time, because of it going on such a long time…”

These impacts are considerable, especially on the elderly, the disabled and children.

The disabled children’s home “Right out that road now there is a great big swamp area and they said they would never ever build on it but I see that they have built a shelter for… I don‟t know what it is…. I believe it‟s for disabled children actually. It‟s not a bad thing for them to build, but they are building it on a place that… They must be aware that it is a flood basin. I thought they were keeping that as protected. The fact that it‟s a bog. They are already building one block.”

Most flood survivors still feel anxious whenever there is heavy rainfall even years after the flood event. “Half the people wouldn‟t even go back to their places and the council was forcing them to go back. And even last year, at the big flood, I speak to people and they were absolutely terrified. And that was at just the thought of it.”

Many suffer from physical and mental effects from flooding, some suffer depression or contemplate suicide and The Samaritans and other voluntary groups do excellent work in helping flood survivors. The Samaritans in particular can provide very high standards of training for those for those working with flood survivors, and insurers, loss adjusters, and damage management specialists should seriously consider such training for their front line staff.

Conclusions Natural disasters are growing in frequency and cost. Climate change is making future predictions of risk more uncertain. The insurance industry can no longer afford to simply react to events. As the biggest industry in the world, with the greatest expertise on risk management of natural disasters, it has to become more pro-active in its dealings with society.

1. The “top down” approach being used in England with central government is not working. In contrast the local approach being used in Scotland has been very successful. Insurers have tremendous expertise and resources which could be put at the disposal of government. The alternative is greater use of litigation 2. Flood management should not be limited to civil engineering solutions. There is a need to start to work with Nature wherever possible using simple, sustainable non structural solutions such as wetlands. 3. Insurers should not dictate land use planning but as experts they have a moral duty to advise and warn of the possible consequences of irresponsible planning. 4. There is a need is to establish a national windstorm claims database similar to the existing flood database to identify why new buildings are more vulnerable than old ones. If government is not prepared to consider more 66

resilient standards, the database could be used to set up an equivalent of the Australian “Blue Book” system. In any event the insurance industry could work with the mortgage lending industry to proceed with preparation of their own set of more resilient building standards for the purposes of new mortgages and resilient repairs. 5. Small business policyholders may find it impossible to find an alternative provider of insurance and have no-one to turn to for help. Perhaps consideration should be given to extending the remit of the Financial Ombudsman Service who at present can only deal with retail (private) customers and commercial customers with a turnover of less than £1m. 6. Architects and planners need to be encouraged to work more closely with insurance industry experts to raise awareness of what is needed and what should be avoided. 7. Climate change and insurance availability is likely to produce the biggest challenge yet for small business. The Small Business Council is urged to work with the insurance industry, architects and planners to raise awareness of the issues. 8. Government and academics should not ignore the insurance dimension or assume that they understand how insurance works. There should be consultation with qualified insurance experts. 9. Insurers already privately fund the collection of large amounts of insurance claims data which can help to identify which parts of buildings are most vulnerable. They should agree common standards such as the FASTER system131 for the collection of further claims data especially for windstorm to enable them to model risk accumulations more accurately and detect fraud. 10. The insurance industry could do more to advise local residents and businesses before and after a major flood. For example advice could be given on temporary flood defences based on a detailed independent assessment132 which has already been published. After a flood event there is a need for a central location where people can obtain independent advice and emergency cash. (Automatic cash dispensers may not be working; they are not designed to be flood proof and need electricity.) At one time the industry used to have a mobile exhibition trailer which was taken to flood events to act as a central independent advice point and coordinate loss adjuster work. 11. The industry should develop a code of practice to provide transparency in cases where it considers the flood hazard to be uninsurable at normal terms and working in conjunction with the Chartered Institute of Loss Adjusters should publish standards on claims handling procedures and resilient reinstatement.

In the longer term, if sea levels are going to rise significantly, society will be faced with the prospect of relocating some of our major coastal cities into higher areas

131 For details see Crichton, D., (2005) “Flood risk and insurance in England and Wales: are there lessons to be learnt from Scotland?” Technical Paper Number 1, Benfield Hazard Research Centre, University College London. Available for free downloading from www.benfieldhrc.org 132 Crichton, D. 2004. “Temporary local flood protection in the United Kingdom. - An independent assessment.” A Benfield Hazard Research Centre technical report. Free download from: http://www.benfieldhrc.org/activities/misc_papers/Temporary_local_flood_protection.pdf

67 inland. If this is the prospect, the sooner government starts planning for this the less disruptive and costly it will be.

Recommendations Government needs to work in partnership with the insurance industry to manage risks associated with climate change. .  As investors, insurers can influence companies which do not control their carbon emissions sufficiently. They can also seek to support and strengthen the European Emission Trading Scheme in partnership with WWF.  As insurers they could o Advise government on areas designated for new development. o Encourage the development of sustainable flood management solutions, again in partnership with WWF. o Promote more sustainable buildings by producing their own building standards which could form a condition for providing cover. o Reward responsible local authorities by safeguarding them from insurance blight.

Insurers have the ability and indeed the duty to ensure that the Government selects a more sustainable path.

Appendix 1

Survey of small businesses by Communicate Research

AXA Climate Change – analysis of selected questions and responses

Q6 Was there anyone else to whom you turned for advice or assistance when your business was affected by a severe weather event?

Base: All respondents whose business has been affected by severe weather events

Who else did you turn to for advice/ assistance?

Don't know/ nobody 61%

Other 12%

MP 2%

Local Authority 4%

Local company/ 4% businesses

Insurance company 6%

Ourselves 13%

These results suggest that as companies become more established they are less likely to rely on self-assistance and become increasingly likely to turn to their insurance company for advice and help. For example, 18% of companies that are less than 5yrs old say they relied on themselves when dealing with a severe weather event, which falls to only 12% among companies that have been established for 31yrs or more. At the same time, none of those youngest businesses say they would turn to their insurance company, but nearly one in ten (8%) of companies with more than 30yrs experience say that they would look to their insurance company for advice and assistance.

Q6b Is there anyone else you think you might turn to for advice or assistance in the event of a flood affecting your business?

Base: All respondents whose business has not been affected by severe weather events

Assistance for those affected/ not affected by severe weather events

Insurance company

Businesses

Local authorities/ council Affected Not affected Just myself

Other

Don't know/ nobody

0% 10% 20% 30% 40% 50% 60% 70% 80%

The chart to the left shows the results for those businesses that have not been affected by severe weather events in red, compared to selected results from the first part of Q6 in blue. The chart suggests that businesses that have experienced the effects of a severe weather event are three times more likely than those companies that have not been affected to turn to their insurance company for advice or assistance (6% to 2% respectively – although it is important to note that these proportions are very small and so should be treated carefully).

Q7 Other than business owners themselves, who do you regard as being responsible for protecting businesses in this area against severe weather events (for example, flooding)?

Base: All respondents

Those responsible for protecting businesses

43%

26%

10% 6% 4% 3% 2%

Don't know Local Council Everyone/ all

Central Government Local utility company Insurance companies

Environment Agency/ SEPA

The chart to the left reveals how nearly half (43% of all respondents) believe that their local council is responsible for protecting businesses against severe weather events.

Only 2% of all respondents feel that insurance companies are obliged to protect businesses. It is notable that this survey also revealed that the majority of businesses (66%) that have been affected by a severe weather event found that insurance companies are the organisations most effective at offering them assistance. In other words, businesses appear to turn to insurance companies when they face severe difficulties, and they do not attach any blame to their insurance companies for those difficulties.

While 6% of all respondents think central government is responsible for protecting businesses (as shown in the chart), 11% of those respondents who have been affected by a severe weather event think that central government should be responsible for this protection – compared to the only 4% of those respondents that have not been affected by a severe weather event who think the same.

Q8 Are you satisfied that this company/ organisation is doing enough to protect your business against the consequences of severe weather events like flooding?

Base: All respondents

Are you satisfied this organisation is doing enough to protect your business?

15%

44% Yes No Don't know

41%

41% of all respondents said that they do not think the organisation they believe is responsible for protecting businesses against severe weather events is doing enough to fulfil that obligation. Less than half (44%) of all respondents are satisfied that this organisation is doing enough to protect their business – suggesting that there is little confidence in bodies such as Local Councils, which a large proportion of respondents expect to take action in this area.

Businesses that have been established for more than 30yrs have the least confidence in the organisation they perceive to have protection responsibilities – with only one in three (33%) of these respondents believing that their nominated organisation is doing enough to protect their business.

There is a lack of awareness of what action is being taken to protect businesses, with more than one in ten (12%) of respondents who have been affected by severe weather events saying that they Don‟t know if the organisation they think is responsible for protecting them is doing enough to protect them successfully.

Q10 Where staff were unable to work because of the extreme weather even that affected your business, how many working days in total do you think were lost to you company as a result?

Base: All respondents whose business has been affected by severe weather events

Number of days lost due to severe weather events

19%

14%

11%

6% 6%

1-5 days 6-10 days 11-20 days 21-30 days More than 30 days

The chart to the left illustrates the spread of working days lost because of a severe weather event. On average, small businesses affected by a severe weather event have lost just over 50 working days due to their staff being unable to work.

The fears of those respondents who said that they are concerned about the risk of severe weather events seem to be well-founded. On average, these respondents‟ businesses lost more than 65 working days to the effects of a severe weather event – the equivalent of three working weeks more than the figure for all respondents.

Q11 What do you think the overall financial cost to your business was as a result of the extreme weather event that affected your business (such as through lost working hours, damage to stock and premises, and loss of custom)?

Base: All respondents whose business has been affected by severe weather events

The financial cost of extreme weather events

19%

16% 16%

14% 13%

Nothing Less than £1,001- £5,001- £10,001- £20,001- More than £1,000 £5,000 £10,000 £20,000 £50,000 £50,000

For those businesses that have been affected by a severe weather event, the average financial cost is £15,460. This sum rises to nearly £30k (£27,480) for those businesses with 11-50 employees.

Perhaps unsurprisingly, retail/ wholesale and manufacturing sectors tend to suffer the largest financial losses as a result of severe weather events – with average costs of £18,860 and £25,770 respectively.

Q12 Did you receive any warning in time to reduce flood losses?

Base: All respondents whose business has been affected by severe weather events

Did you receive warning in time to reduce flood losses?

No 86%

Yes 8%

As can be seen in the chart to the left, the overwhelming majority (86%) of those respondents who have been affected by a severe weather event feel that they did not receive enough warning to be able to limit their losses.

This figure rises to 95% for those companies with 11-50 employees, which may reflect the degree to which slightly larger companies are less flexible in their ability to react to severe weather conditions.

Q13a How long did it take before your business resumed trading to previous levels?

Base: All respondents whose business has been affected by severe weather events

Time lapse before return to normal trading levels

42%

17% 14%

8% 8% 6% 4%

1-3 months 3-6 months 6-12 months Never/ not yet Less than a week 1 week to 1 month More than 12 months

On average, respondents who have been affected said their business needed more than two months to recover previous trading levels following a severe weather event, while nearly one in ten (8%) have never recovered.

As the two charts below indicate, the reality is much harsher than the consequences predicted by those who have not yet been affected by a severe weather event. For example, 73% of respondents who have not been affected believe that their business will recover normal trading levels within one month of a severe weather event, whereas in fact only 59% of businesses that have been affected managed to recover within this time.

Similarly, the proportion of respondents who have never managed to recover their normal trading levels following an actual weather event is four times higher than the number of respondents who think they will not be able to recover should they have to face a severe weather event (8% to 2% respectively). This inaccurate appreciation of the costs of severe weather damage is most apparent among businesses with 11-50 employees – 58% of respondents from these companies who have not been affected believe that they could recover trading levels within a week of a severe weather event, while in fact only 27% (less than half that proportion) of those businesses actually faced with a real event managed to recover their trading levels within that time. 76

Q13b If your business premises were hit by an extreme weather event such as a severe storm or flooding, approximately how quickly to you think you might be able to resume normal trading levels?

Base: All respondents whose business has not been affected by severe weather events

Expected recovery times

45%

28%

8% 5% 3% 2% 0%

Never

1-3 months 3-6 months 6-12 months

Less than a week 1 week to 1 month More than 12 months

Comparison chart

Expected and actual recovery times

50% 45% 40% 35% 30% Expected recovery time 25% Actual recovery time 20% 15% 10% 5% 0%

Never

1-3 months3-6 months 6-12 months

Less than a week 1 week to 1 month More than 12 months

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Appendix 2 Focus Groups in Elgin and Carlisle

Elgin and Carlisle were selected for the focus groups because a considerable number of homes and small businesses have been flooded there recently. The meetings were held under the Chatham House Rule of the Royal Institute of International Affairs, Chatham House, London as amended in 1992. The Rule states:

"When a meeting, or part thereof, is held under the Chatham House Rule, participants are free to use the information received, but neither the identity nor the affiliation of the speaker(s), nor that of any other participant, may be revealed".

The focus groups were split into two streams, businesses which had directly benefited from the floods in the short term, and businesses which had suffered. This was intended to encourage discussion and worked very well. A business which had benefited might have been inhibited from talking freely in front of businesses which had suffered, and vice versa. In practice all businesses suffered in the long term. Quotations gathered during the focus group meetings are included in the body of this report where appropriate.

Elgin133 Elgin is the county town for Moray, which lies to the West of Aberdeenshire and was once part of Grampian Region in Scotland. Moray is perhaps best known for RAF Lossiemouth and the many excellent malt whisky distilleries in the area. The River Lossie has a documented history of flooding dating back 250 years. Twenty flood events have been recorded since 1750, with 11 floods in the last 50 years. Most recently Elgin has flooded in 1997, 2000 and 2002. Severe flooding occurred in Elgin in July 1997 and November 2002. During both events extreme rainfall fell for over 48 hours on the upper part of the catchment on already saturated ground. Normal flow in the River Lossie is approximately 5 cumecs134. During the 1997 and 2002 events the flow reached 122 cumecs and 140 cumecs respectively. The 1997 event is estimated to have a return period of 1 in 40 years. The event inundated approximately 600 residential and 170 commercial properties. The 2002 event is estimated to have a return period of 1 in 60 years. In this instance more than 650 residential and 180 commercial properties were inundated. Typical flood depths during the two events ranged between 0.15m and 1.0m.

Table Number of properties at risk from flooding in Elgin

Return period (years) Residential Commercial Total 1 in 5 135 10 145 1 in 10 340 45 380 1 in 25 405 135 540 1 in 50 690 185 870

133 This section uses information from Crichton, 2004. “Flood risks in the former Grampian Region since Devolution” WWF Scotland. 134 Cubic metres per second 79

1 in 100 765 235 1000 1 in 200 865 275 1135

An interesting feature of the history of Moray flooding is the seasonality of floods in the last 50 years. Between 1956 and 1997, there were eight flood events, all occurring in July or August and due to summer thunderstorms. In each case the synoptic conditions were virtually identical and involved an airstream from the North being blocked over Moray by a Westerly air stream causing continuous rain for two or more days. July or August floods • 1956 (twice) • 1957 • 1958 • 1970 • 1978 • 1982 • 1997 However the most recent floods have occurred at different times of the year: • April 2000 • November 2002 It is interesting to speculate on why floods are starting to happen at different times of the year. There is no reason to suppose that summer floods will not continue at the same frequency as before, but if autumn and spring floods are now starting to happen as well, is this the start of a future trend? If so, the frequency of future flooding could be much greater. It should also be noted that summer floods tend to cost insurers half as much as floods at other times of the year, because the warm weather helps to dry out properties. If there are to be more autumn floods they will be much more expensive.

Carlisle A storm on 8th January 2005 caused extensive flooding in Carlisle. The floods followed two months rain in 24 hours, a 180 year return period event135. At Shap, 227mm (9 inches) of water fell in 72 hours. All the water falling on the north Lakes, and northern Pennines has to pass through Carlisle. There are three rivers in Carlisle, the Eden, Caldew and the Petteril, all flowing into the Solway Firth. Peak flows coincided with high tide in the Firth. Water levels in some places rose about 4 feet in an hour. Houses were up to six feet deep in water contaminated with sewage and oil and in some parts of the city the water was 15 feet deep. Electricity supplies, telephones and mobile phones all failed to work, even the police radios as transmitter batteries failed. There was a total communication blackout. The local BBC radio station was praised by all as the only source of information, but only for those with battery radio receivers. The council offices and the main police and fire stations were located in one of the lowest parts of the floodplain and had to be abandoned at an early stage in the flooding. A warehouse containing spare police uniforms was flooded and the police had no way to obtain clean, dry uniforms. Emergency services were dependent on Coastguard radios.

135 Robertson, D., 2005. “The Great Flood: Cumbria 2005” 168pp. Hayloft Publishing Ltd, Cumbria. Ca17 4DJ. ISBN 1 904524 28 1. 80

It was not just the flooding: there were also severe winds. The storm was described as a “weather bomb” by the Met Office. A wind speed of 128mph was recorded causing damage to houses as well as widespread power cuts. More than half a million trees across the county were blown down, and flooding occurred in many parts of the Lake District as well as Carlisle. 90% of schools in the county were closed because of flooding, storm damage, or lack of electricity.

It is reported that the main surface water drainage and sewage in Carlisle converged on a single manhole, and according to one flood survivor, who has researched the matter in some detail, there was only one outflow pipe from this manhole and it led into the river. This survivor also alleges that over 30,000 properties have been connected to the sewage system in excess of its design capacity. During the event the outlet was sealed by a flap valve as the river rose leading to backup into the manhole and sewage overflow into housing and businesses. Anecdotal evidence indicates that the first sign of flooding and much of the early damage (including to the electricity sub station) was from this sewage overflow which happened before the rivers burst their banks. It appears there are no plans to increase the sewage capacity and the new flood wall currently being built will, it is alleged, trap the sewage overflow in the area of the houses behind the wall, making matters worse. There are no plans to increase flood storage upstream of Carlisle, this may be because of an unfounded fear that restoring rivers and wetlands might be in breach of the EU Water Framework Directive legislation. In Carlisle two people died from the floods and one from the storm.

As the storm moved north many other locations were affected. Many homes were flooded in the Stirling area, and there were also floods in Peebles in the Scottish Borders. Several roads were closed due to flooding and landslides, as was the rail line between Inverness and Perth. More than ten lorries were blown over on the M6, and 25 lorries overturned on the A1(M) near Darlington between junctions 58 and 63. In Ireland, 60,000 homes were without power. Gusts of 102mph were recorded off the Lleyn Peninsula, in North Wales. At Cairnryan, near Stranraer, the “European Highlander” ferry with 100 passengers on board was blown onto rocks. No one was hurt but a few days later, on 11th January, a family of five people in South Uist were killed when their car was washed away as they tried to reach safety along a causeway. Winds in the Western Isles reached 124mph and lasted 16 hours. The Stornoway Coastguard rescue helicopter was grounded by the weather for the first time in 18 years.