UK-headquartered professional services group KPMG is warning that the cost of this December’s floods could be as high as £5. 8 billion – an initial estimate.

KPMG is currently working with organisations across the North as they respond to the current flooding - one of the firm’s roles is assisting in quantifying the financial impact of the damage.

Justin Balcombe, KPMG’s UK head of general insurance management consulting, commented:

“The scale of the flooding over the last few weeks has seen communities across large sections of Northern England, Wales, Scotland and Ireland severely impacted. In 2007 when a similar pattern of flooding hit, total insured claims were £3.2bn, however, we consider that the actual financial impact far exceeded this. We are assessing this month’s events through a number of economic lenses, resulting in an initial total cost estimate of £5bn-£5.8bn.”

KPMG are putting the estimated cost of claims to be made by insured homeowners and businesses at between £1 billion to £1.5 billion. Under insurance is likely to cost a further £1 billion, with the limits on many insurance policies meaning they are inadequate for covering the full loss.

KPMG said this is driven in part by homeowners still feeling the effects of the recession and reducing insurance premium spend and coverage. In addition, businesses that have been impacted by flooding may take longer to return to pre loss profitability while their insurance coverage may not extend beyond a notional 12 month business interruption period.

Justin Balcombe added:

“We believe that there is a serious level of under insurance and would estimate this economic impact to be as significant as the insured event, to the tune of an additional £1bn.”

Local authorities and infrastructure costs between £0.5 billion to £0.75 billion

Some of the cost to local authorities for the expense of returning communities to normal will be covered by insurance. However, KPMG said the scale of the flooding and the level of infrastructure damage, including knock on affects and claims to public transport, utility companies and social services suggests the government will be required to provide additional funding. This excludes any further investment into reinforcing flood defences.

KPMG is also predicting a business loss funding gap of between £50 million and £100 million. “Grey areas" of business coverage such as loss of attraction and market value are not typically covered by insurers and therefore represent significant costs that businesses must absorb as they work to recover.

At this stage,  KPMG’s overall economic estimate at this stage is between £2.55 billion to £3.3 billion, with considerable additional costs looking ahead.

Flood defence repair and replacement to cost £2 billion

In addition to the economic estimate, KPMG has put the cost of repairing and replacing flood defence at around  £2 billion, representing the cost of repairing and replacing flood defences, the impact on next year’s insurance premiums in renewal, inflation and exceptional costs, based on prior year’s spend and parliamentary recommendations.

Taken together, this will result in a longer term economic impact of between £4.55 billion and £5.3 billion.

When the cost of potential changes to the insurance industry business model  is added in, which KPMG predicts will be around £0.5 billion as insurers and their supply chains will be required to rethink their business models and products, the result is a total estimate of impact cost due to flooding of £5 billion to £5.8 billion to the UK’s insurance sector, businesses, individuals, communities and government.

KPMG said some of the cost of this change will be passed on through an increase in premiums and risk transfer to Flood Re and other reinsurers. However insurers will initially stand the business change costs through internal investment in IT, skills and process improvement.