SMEs and flood insurance: Assessing the effective resilience using contextualised evidence

Flooding is one of the biggest challenges reported by small to medium-sized businesses (SMEs) in the UK, and flood insurance is an important tool for reducing SMEs’ future flood risks. Insurance pricing depends on knowing an SME’s risks and level of resilience with confidence. However, SMEs present different risk profiles and levels of vulnerability due to their heterogeneous and diverse business characteristics. At the same time, flood insurance may risk moral hazard if the SMEs’ flood risk awareness and protection behaviour are not improved. This study adopts a participatory approach to co-design a methodology to better evaluate the SMEs’ flood resilience and effectiveness of flood mitigation and adaptation strategies. Through online surveys, semi-structured interviews, focus group discussions, and workshop discussions with lenders, insurers, surveyors, brokers (LIS-B), and SMEs, the Tool to Assess Effective Resilience (TAER) is co-developed. While important, professional flood risk assessment and flood depth damages are not sufficient on their own, stakeholders we engaged throughout the study indicated that well-kept descriptive and photographic evidence and the positive attitude that is associated with their behaviour make those types of evidence much more compelling and convincing when they are deciding to insure or lend to specific businesses. When used actively and correctly by the SMEs and relevant insurance stakeholders, the tool has the potential to reduce the risk of moral hazard by encouraging SMEs to initiate or improve resilient behaviour and facilitate communication and knowledge exchange between SMEs and the insurance providers, thus driving a positive behavioural change in all parties.