The Great Debate UK

Britain’s floods: How do we pay the £14 billion bill?

Nikolas Scherer is researcher at the Hertie School of Governance and Visiting Fellow at LSE IDEAS. The opinions expressed are his own.–

In some parts of the United Kingdom, the recent floods are the worst on record. Since December 2013, over 5,800 homes have been flooded in England alone. The cost to the UK economy had been estimated at as much as £14 billion, from damage, lost business and general economic slowdown. Whatever the exact figures, the bill will be immense.

At some point, the government has to consider where to get the money from.

There may be lessons to be learned here from a recent trend in the developing world, which has been to use climate insurance, or more technically speaking, index insurance instruments, to hedge against adverse weather events.

In contrast to traditional insurance, the payout is predetermined and depends ultimately on the realisation of a specific weather event – for example a certain wind-speed measured at a particular weather station for a given period of time – and not on the ex-post assessment of a loss adjuster. Pay-outs can be made very quickly and allow a quick influx of capital on a state’s balance sheet: money with which the government can begin the rebuilding process.