Companies affected by floods are working with a ground-breaking project aimed at protecting their future business interests.
The study, led by the University of Leeds, was set up to highlight the true monetary cost of flooding to the business sector and local communities. It aims to establish a framework in which insurers work more closely with businesses that have struggled in the past to secure flood insurance.
The research found that in the winter of 2019/2020, floods in Calderdale cost local companies about £43 million in direct losses, plus £25 million in indirect losses.
The work was mainly funded by the Yorkshire Integrated Catchment Solutions Programme (iCASP), with further funding from the UKRI Natural Environment Research Council, Economic and Social Research Council, the West Yorkshire Combined Authority and the Environment Agency.
The companies taking part in the insurance study are from a sector described as the “lifeblood” of UK business – Small and Medium-sized Enterprises (SMEs).
A report detailing the main findings, Bridging the Knowledge Gap to Boost SMEs Resilience, is published today.
“We are expected to experience an increase in extreme weather events – with flooding the UK’s main climate-related threat.”
DR PAOLA SAKAI, CLIMATE CHANGE ECONOMIST
The lead author is Dr Paola Sakai, a climate change economist at Leeds’ School of Earth and Environment.
She said: “SMEs are the lifeblood of local economies. At present, SMEs that have previously been flooded or are based in a floodplain find it very difficult to secure flood insurance.
“With temperatures rising globally, we are expected to experience an increase in extreme weather events – with flooding the UK’s main climate-related threat.
“As a result, both SMEs and the insurance industry will suffer, as more businesses become ineligible for flood insurance.
Flooding costs
Apart from the direct cost of flood damage to property and stock, said Dr Sakai, there were significant additional costs, particularly if companies are part of supply chains and had to temporarily close for a significant period following a flood.
“It is increasingly important that local and regional authorities have a better understanding of both the direct and indirect costs of the impact of flooding on SMEs and that the insurance industry offers more adequate insurance products,” she added.
Flooding has caused devastating consequences to the business sector nationwide. Floods in southern England during the winter of 2013/14 resulted in losses of about £830 million.
In Calderdale, West Yorkshire, winter floods in 2019/2020 cost £43.3 million in direct losses, plus an estimated £25.1 million in indirect losses, according to the new study. For each £1 of direct losses such as loss in trade due to business interruption, there are £0.63 additional losses across the local and regional economy.
Essential SMEs
The study’s co-author Dr Marco Sakai, a Lecturer in Ecological Economics at the University of York, said: “SMEs are an essential part of any region’s economy and represent an essential fabric of communities.
“In fact, they are responsible for 99 percent of the business base in Yorkshire, providing vital employment, goods and services.
“Not taking effective action to mitigate flooding decreases the resilience of not only SMEs, but also of entire towns.
“By preparing for future floods, SMEs can limit the disruption caused by water damage and work with insurance companies to protect and even expand their business.”
As part of the new study, 135 SMEs were surveyed, of which 126 are located in 15 districts across the Yorkshire and the Humber region, and 6 SMEs were analysed in more depth.
The research was set up with local and regional authorities, insurers, lenders, surveyors and brokers to address gaps in knowledge. It follows a Leeds City Region Flood Review published in 2016 and has been developed in partnership with the West Yorkshire Combined Authority, Leeds City Region Enterprise Partnership (LEP), Leeds City Region local authorities, and the Environment Agency.
Direct financial costs
The project team worked with local and regional authorities to develop a tool to examine the direct financial costs and wider indirect economic costs of flooding on SMEs. The tool was piloted with 135 SMEs. A second tool was developed with lenders, insurers, brokers and surveyors to better understand SMEs’ flood risk management strategies, allowing them access to improved insurance. This tool was piloted with 6 SMEs.
Roger Marsh, Chair of the LEP and NP11 Group of Northern Local Enterprise Partnerships, said: “This project will help improve the economic assessment tools that we currently use to determine the true costs of flooding to SMEs and its wider economic impact on our communities.
“The tool developed by the University of Leeds will also enable us to better articulate the need for future investment in flood risk management infrastructure and our response to future flood events across the City Region.”
According to the new study, medium sizes companies reported direct economic losses of 24% of their monthly turnover on average, while for smaller firms losses were 113%. Areas hit hardest were equipment, business interruption and exterior repairs. It took an average of four months for businesses to return to pre-flood level of sales.
The 2019/2020 winter floods caused premises to close for an average of 13 days, with the loss of 57 jobs and a 31% drop in sales for the first month after flooding.
Views from the sector
Professor Colin Mellors, Chair of the Yorkshire Regional Flood and Coastal Committee said: “Flooding impacts on communities in many ways – businesses and infrastructure, as well people’s homes.
“The YRFCC has been very pleased to encourage and support this important research from the outset. SMEs are a crucial part of our economy and have often been severely affected by flooding, some repeatedly. A unified methodology for understanding that impact more fully and helping show how SMEs can be better supported will greatly assist our broader resilience agenda.
“We very much welcome the findings of the research and hope that they will inform future approaches in respect of those SMEs vulnerable to flooding and coastal risks.”
Cllr Tim Swift, West Yorkshire Combined Authority’s Portfolio holder for Climate and the Environment said: “This study is helping us better understand the needs of SMEs and improve our flood risk management strategy. This collaborative initiative is an important step towards our ambition to make West Yorkshire a place where everyone can enjoy the economic, health and environmental benefits of a net-zero carbon economy by 2038.”
Ian Gibbs, National Technical Manager at Sedgwick said: “SMEs in high flood risk areas face a real challenge getting affordable flood cover. This project is key to helping insurers/brokers and SMEs capture and understand the effectiveness of the flood resilience that has been put in place, so decisions can be made with a detailed understanding of the flood risk.”
Graham Brogden, Managing Director at GJB Consultancy Oxford Ltd said: “Flooding can have a significant impact on SMEs with many of them failing to open following a flood. Resilience plays a crucial part in helping them recover more quickly, potentially saving their business and allowing them to source insurance cover. This study is helping businesses and insurers understand the importance of protecting their property and the effectiveness of those measures.”
Ralph de Mesquita, Senior Technical Risk Engineer at insurer Zurich said: “Understanding the costs associated with flooding will help SME’s justify the time and expense of installing property level flood resilience measures. From our experience, for every £1 invested in flood resilience on average saves £5 in future losses. Preventing, or at least minimising the impact of flood events, will allow businesses to recover quicker.”
Stephen Curry, director, UCVR (Upper Calder Valley Renaissance) said: “Since the 2015 floods in the Calder Valley, UCVR has collaborated with the universities of Leeds and York to co-create a project that puts SMEs in the spotlight when it comes to issues of insurance and of economic recovery. This project does both and we are pleased to have been involved and excited for the businesses about the results and recommendations.”
Further information
Bridging the knowledge gap to Boost SMEs Resilience was led by Paola Sakai (University of Leeds), and Marco Sakai as co-investigator, with co-authors Zeyu Yao, Francesca Falcini, and Cecilia De Ita (all University of York). Visit the project website to find out more: https://icasp.org.uk/projects-2-2/bridging-the-knowledge-gap-to-boost-sme-resilience/
The Leeds City Region Enterprise Partnership (LEP), Sedgwick, GJB Consultancy, Upper Calder Valley Renaissance (UCVR), Ambiental, and the Defra Task Force were also key collaborators on this work.
The Yorkshire Integrated Catchment Solutions Programme (iCASP) is a five-year programme, funded by the Natural Environment Research Council. iCASP projects are designed by partnerships of academics and experts from organisations active in catchment management.