Flood damage could cost insurers £1bn but aid recovery

Estimates of the damage caused in the recent weeks of floods and storms will rise after the weekend's further tumultuous conditions.

Although there is a wide range of estimates, the cost of clearing up the damage after rain fell on water-logged ground this weekend has most-commonly been put at around £1 billion.

Robert Muir-Wood, chief research officer at catastrophe modelling firm RMS, has said the last month had been "the most severe sequence of storms since 1990".

Accountancy firm PricewaterhouseCoopers put the cost of flooding in December and January at £630 million, including a £500 million bill for insurance companies. However, that was last week and it has been revising its data upwards after each spell of rough weather.

Insurance firm Hiscox argued the cost will be greater as rain continued to fall in parts of the south west, and flooding spread to some more densely populated and high-cost areas along the Thames in Berkshire and Surrey.

After the 2007 floods, the insurance industry faced a bill of £3 billion. However astonishingly analysts do not think this bout of extreme weather will cause as much damage unless the storms extend all the way to April.

Mostly it is a reason of geography. Until the last week, most of the damage this time has been in Cornwall and around rural Somerset and had not inconvenienced a major town or industrial facility. With the flooding now spreading to a key region of the UK's economic heartland, early estimates could quickly change.

7,000 families have currently evacuated their homes. Last time the amount each individual household claimed for flood damage averaged between £30,000 to £40,000, or £280 million for this category of claim.

In 2007 around one quarter of insurance claims were made by businesses claiming some form of commercial interruption. Again, the areas hit this time have a very different profile.

The Environment Agency has 16 severe flood warnings now in place for the south west and the Thames Valley, with nearly 130 flood warnings and more than 180 flood alerts, so it is still a fluid picture.

Beneficial for the UK economy

Overall, the economy could actually benefit, as did the Japanese recovery after the Kobe disaster in 1995, because much of the clean-up effort feeds through into economic growth as it creates the need for infrastructure-build and commercial activity.

For instance, the broken rail line at Dawlish will take at least six weeks to rebuild. The prime minister has also promised grants for homeowners and businesses to improve flood defences.

Recent retail spending is rising at its fastest rate in four years and this reflects soaring sales of furniture, some of which have already been attributed to the flooding.

The British Retail Consortium last week reported that sales of furniture, particularly new sofas and beds, were growing more strongly than at any time since April 2006 and were the top performing sector, adding that as well as the housing price boom, the weather had forced people to buy replacement furniture.

Internet shopping, which does not involve braving the weather, is now more popular in the UK than in any other nation.

The UK's biggest listed insurers, such as Aviva, RSA and Direct Line, are all scheduled to report full-year earnings in the next few weeks.