Britain's insurance companies face a hefty bill as a result of the recent bad weather. PwC estimates that the industry may need to fork out £500 million but the final bill could easily be double that. The 2007 floods cost companies an estimated £3.2 billion. Admittedly, it will be months, even years, before they actually settle all the claims. Contra the Labour leader Ed Miliband, one cannot make an insurance payout on a property that is still a metre deep in water. But the interesting question is why insurance companies don't step in to prevent the damage in the first place.
Companies know whom they insure and what the likely risks are. If we can predict flooding sufficiently far in advance, isn't there an opportunity for private insurers to apply the old adage that prevention is better than cure?
It doesn't seem too hard to imagine. Faced with predictions that an area is expected to experience extreme rainfall in the near future, insurance companies could contact their customers with a simple and attractive offer: we'll come, flood-proof your home and move your possessions into storage. If there are things in your house that you desperately need we'll move them upstairs. The rest can be taken to some big warehouse on a hill. Once the flood waters subside, the company could return people's possessions and either remove the flood defences or sell them to their customers for future use.
This needn't be altruistic. For the insurers, a stitch in time could save a vast sum of money, not only in reduced payouts but also in the deadweight cost of investigating and deciding upon claims. The service needn't be free: even if the insurance companies charged it would represent a clear win for their customers. Faced with seeing their homes and valuables destroyed, their lives massively disrupted and many months of battling with the claims adjusters, many customers would surely be happy to fork out a few hundred pounds to protect their property. They would have to pay the excess on their claims otherwise so it needn't cost any more. Insurance never compensates fully for losses anyway (try claiming for lost cash!) and some things are irreplaceable.
For the insurance companies, the opportunity goes far beyond avoiding expensive payouts. The first company to offer this service would attract a large number of new customers across lowland Britain. Existing customers would be less likely to defect - good customer service is a great way of keeping price-sensitive customers. And those who opt to buy the permanent flood-proofing will be less costly to insure and will face lower premiums in the future.
Sadly, it is unlikely that this model could be scaled up to protect whole towns and villages. While there might be enormous marketing value from surrounding an entire settlement with branded dykes ("this levee is brought you by..."), the moral hazard for residents would lead to free-riding, and if people underinsure the opportunity cost to the insurance companies would be too high. On the other hand, if they protect - rather than merely compensate the owners of - those houses that are insured, it would send a powerful signal to those who are tempted to skimp on insurance.
So come on, insurers. Let's have a little enlightened self-interest. Do yourselves a favour and start flood-proofing your customers' homes. A few flood boards with the corporate logo stamped on the side might do your firms and the wider industry the world of good. And it will spare us having to see Miliband in his wellies next year.Suggest a correction