Small businesses are increasingly at risk from flooding due to the current situation of property development and the increasing risk of flood events actually occurring. The small-scale nature of these businesses often means that they are ill-equipped to deal with their business premises being flooded, and this is especially the case for businesses such as hotels, bars and restaurants, which have no way of continuing their business in the event of a flood.
However, despite this severe danger, research in August 2006 had shown that 90 per cent of SMEs were under-insured, with 70 per cent of businesses in high-risk areas not being concerned that flooding would affect them.Footnote 3 Also in 2006, while 85 per cent of businesses were aware that climate change is an increasing problem for the world, 46 per cent of SMEs thought that climate change was blown out of proportion and only 26 per cent thought that it is a real threat to them.Footnote 4
Surprisingly, when this research was repeated by AXA Insurance in August 2007, it was found that small business leaders are today less concerned that climate change is a serious problem for the world, with the proportion saying they are concerned falling from 85 per cent to 77 per cent. In 2007, 45 per cent of all respondents said that the issue of climate change has been blown out of proportion (compared to 46 per cent in 2006) and 30 per cent said that they see climate change as a real and serious threat to their business (up only marginally from 26 per cent in 2006).
When small businesses were asked how they have prepared against the effects of flooding and severe weather events (and this research was done after the June and July 2007 floods), only 59 per cent said that they are insured against business interruption or loss of earnings. Even among those who have already been affected, insurance take-up is low, with less than two-thirds (62 per cent) of these companies saying they have insurance against weather interruptions. Only 35 per cent of all small business leaders say that they are concerned about the risk of flooding and 65 per cent of businesses do not have a practical contingency plan in case they are affected by severe weather. Similarly, only 27 per cent have reviewed their commercial insurance to tackle the threat from severe weather conditions, only 24 per cent have reviewed their weather proofing and 20 per cent or fewer of all small companies have introduced home working or flexible working or sought advice from government on how to react to severe weather disruptions.
SMEs are therefore at great risk of being put out of business entirely by a major flooding incident due to being inadequately prepared for the event. When considering substantially under-insured properties, insurers are not obliged to pay out the full amount covered by the policy if it can be shown that the property is indeed under-insured. SMEs being put out of business in this way could cause a rise in the cost to the economy of up to 30 or 40 times what it is now by 2080 if current climate change and attitudes to development and adaptation to it continue. This would cost the U.K. economy up to £42 billion every year in today's prices as a result of business interruption.Footnote 5
Finally, a lot more businesses are likely to be at risk in the future due to a trend of business downsizing currently occurring in Britain, which affects how severely a business will be impacted by a flood. The outsourcing of storage and distribution operations to third parties also has the potential to reduce business resilience as the business would then lose direct control over these operations and would find it hard to deal with these being put out of action by a flood.