Deluge That Could Drown an Industry

The bill to repair homes and businesses in flood-stricken countries in mainland Europe is estimated at more than €6bn (£3.4bn) and could increase as the waters rise, raising the threat of huge insurance claims.

Such potentially large payouts come at a difficult time for the insurance industry, which is still recovering from the September 11 terrorist attacks and dealing with the turmoil in world markets that is sapping their financial strength.

Yet, as the major insurers start to tot up their exposure, there are signs that governments rather than the industry might end up paying the largest portion of what threatens to be an enormous bill.

This is because cover against flooding is not provided as standard by insurers in many parts of western Germany, Austria and the Czech Republic - three of the countries hit hardest by the torrential rain which is the heaviest recorded to date in some regions.

As many householders are without direct cover, insurance industry experts expect them to turn to governments for help with rebuilding their homes and livelihoods.

Even so, the scale of the floods and their geographical spread means that insurance companies will still face claims running to hundreds of millions of pounds. Insurance companies such as Munich Re and Allianz of Germany are thought to have some of the greatest exposure.

Ivo Menzinger, who heads the flood group at Swiss Re, the major reinsurance company, said: "What is unusual is the special extent of the phenomenon - from the UK to the continental areas down to the Black Sea."

Early estimates are starting to be made for the economic losses in the flood-hit areas. Austria is estimating €3bn; the Czech Republic is warning that it expects the cost to be bigger than the €2bn in curred in July 1997; Germany has made no official estimate but industry sources believe the total amount will top €1bn.

Mr Menzinger, however, believes the bill for the insurance industry could be much lower. Comparisons with past events suggest that in the Czech Republic only 20% of homes and businesses will be covered. In Germany only about 10% of Bavarian residents are likely to have cover, although in parts of the former East Germany the coverage against floods is historically higher.

In assessing the bill, loss adjusters will also be looking at the type of water damage, particularly whether it was caused by flash floods or slowly rising river water. Flash floods, for instance, tend to cause more damage to infrastructure.

German insurer Allianz yesterday admitted that it was very difficult to give realistic estimates. In Italy, Allianz expects claims to run to the low single digits of millions of euros, while in Austria it will be low double digits of millions. A spokesman said that many people were not insured in Germany.

While the insured losses may prove to be small in comparison with the scale of the total damage, the rating agency Standard & Poor's pointed out that one insurer collapsed as a result of the last major flooding in 1997 and that others needed emergency cash injections.

In most parts of mainland Europe insurance against flooding has traditionally been sold separately, and not as part of a wider insurance policy as is commonly the case in Britain.

But this way of selling insurance may be about to change in Britain. The Association of British Insurers said yesterday that its members had agreed to provide cover to those in areas prone to flooding until the end of the year, pending more details about a promised £150m national flood defence scheme. This has prompted many householders in the UK to fear they may be "red-lined" and subsequently unable to buy cover against flooding.