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An introduction to disaster insurance

Last updated: 01 April 2022

An introduction to disaster insurance

Anything that seriously interrupts your business can end up costing you a lot of money and even destroy it altogether. Climate change has the potential to have a severe effect on small businesses and yet most UK businesses are woefully unprepared and underinsured.

This series of articles looks at the effect of climate change on small businesses, why firms should review their disaster insurance, how to reduce the risk of being affected and how to put a plan in place to help keep the business afloat should the unthinkable happen. In fact disaster insurance isn’t just about climate change. What if there was a terrorist attack, or another Buncefield?

Buncefield, the huge oil depot explosion of December 2005, affected 400 businesses, caused 25,000 job losses and an economic loss of £5 billion. Furthermore the impact of the Company Law Reform Bill will probably mean company directors have to take these issues on board and take responsibility in ways previously unseen.

The worldwide insurance bill is set to leap from £20 billion in 2001 to £200 billion by 2050 and much of it can be put down to climate change. UK businesses are vulnerable. Last year was the warmest on record in Britain. Globally, it was the sixth hottest. Severe floods, like the one that hit Boscastle, freak weather similar to the tornado that hit London in 2006, and ever more powerful storms and dramatic changes in rainfall patterns may become the norm rather than the exception. Heatwaves, droughts, storms and rising sea levels will affect businesses.

We know the world is heating up and the ice caps are melting at an unprecedented level (by 2060 there could be no summer sea ice in the Arctic at all). Drought in the Horn of Africa has also been particularly intense in recent years. But the next couple of years could see the changes rapidly intensify. El Niño, for example is set to be particularly savage this year. (It is a weather pattern occurring every two to seven years, and the last severe El Niño in 1997 and 1998 caused more than 2,000 deaths and a worldwide damage bill of more than £20 billion.) Its effect on the British climate is, according to experts, difficult to predict. But it could last up to 18 months and will probably add to the likelihood of record-breaking temperatures in the UK. El Niño and its twin, La Niña, (fall in temperatures) are, apart from the seasons, the two largest single causes of variability in the world’s climate from year to year. Both are dictated by shifts in temperature of the water in the tropical Pacific basin between Australia and South America.

Whatever is happening elsewhere in the world small businesses need to review disaster insurance and prepare their companies for the effects of climate change right now. An Axa survey found that while 85% of small businesses are aware that climate change poses a serious threat for the world, only 26% see it as a threat to their business. Yet in the next seventy years flood risks in the UK will probably more than double and severe storms will be more widespread, especially in England.

Longer periods of freezing conditions ( the winter of 1995/6 cost insurers £350 million in burst pipe claims) cause more problems for businesses. And there may be longer periods of power cuts. Employees may not be able to get to work in extreme weather, or may take more time off sick due to accidents and falls.

And when businesses are not worrying about the effects of blizzards and floods, they may want to consider the effects of heatwaves. Climate change projections show that it is likely there will be more severe heatwaves like the one in 2003 which killed over 35,000 Europeans. UK buildings – especially offices – are not designed to cope with very high temperatures, nor are its occupants. What can be done? More air conditioning is an obvious solution, although this has its own effect on global warming. Better designs which allow buildings to remain cool in the European fashion, and external shutters to reduce heat and glare may be considered long term. Short term measures include putting desks and computers away from heat and glare, providing water coolers and allowing staff to dress in cooler less formal clothing. Eemployers should look out for any new Health and Safety guidelines which may come into force. (Sign up with Business Link for automatic email updates). If temperatures were to rise significantly, perhaps minimum and maximum working periods would be useful. Hotter weather could bring more headaches for businesses if tropical diseases such as malaria make a comeback.

Buildings may also suffer from significantly more subsidence if the temperature hots up. And although UK summers would be drier, flash floods and thunderstorms may become more prevalent. Buildings could become inhabitable after flooding if toxic mould spores take hold.

Another reason for taking disaster policies seriously is the impact of the Company Law Reform Bill. This could have serious implications for company directors and their responsibilities and liabilities. It will probably create more of a need to protect shareholders’ interests, part of which would be a Business Resilience plan. Furthermore the Civil Contingencies Act 2004, has specified that since May 2006, Business Continuity planning must be promoted to businesses and voluntary organisations.

The British Insurance Brokers’ Association recently found that three quarters of SME owners had no disaster recovery plan in place. Less than half were prepared for a recovery from a flood or fire. Apart from the initial damage, businesses also suffer in the interim before they get back up and running again. Some never recover.


Useful websites Advice for managing flood risks. Comprehensive guides on continuity planning with free downloads. British Insurance Brokers Association. Provides useful information on business resilience. This is fairly self-explanatory!

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