A useful scapegoat

By developed-world standards, and particularly for a country with such a benign climate, the recent flooding has caused hardship on quite a large scale.

At the same time, some people will inevitably benefit from it. Most of that is entirely legitimate: builders and repairers, suppliers of food and goods to replace what’s been damaged/lost, etc – all indirect beneficiaries whose markets suddenly grew.

Will there also be direct beneficiaries? Well, there’s financial and political capital to be had. There’s damage and dilapidations, both preexisting and caused by the flood. Large figures are floating around: estimates for total damage, insurance payouts, uninsured losses, and state help (taxpayer payouts). The latter is the most controversial, with politicians and other representatives of the affected areas staking out their claims.

First up was about a month ago when Yorkshire caught the brunt of the first round of flooding. The prime minister announced help for the afflicted areas, and someone from Hull (Mayor? Council leader?) complained bitterly that it was utterly inadequate. That’s reasonable: it’s his business to get the best deal he can for his city, and he’d be failing in that if he sounded satisfied when he judged he could hope for more. Today we had a councillor for Gloucestershire telling us road repairs alone would cost £25M in her county. Same story: she wants the best she can get for her area.  And they all want to stake out positions.

All of which begs the question: what is insurance supposed to be for, if the taxpayer is going to fork up when a disaster happens? And why is a victim of flooding more deserving of being bailed out than a victim of vandalism, burglary or fire? Could it be because it’s a public/media event, and politicians need to be seen to do something? What, me, cynical?

Well, if I were from the insurance industry, I’d be looking at policies with explicit exclusions for large-scale natural disasters, on the grounds that there’s public money to cover them. Save a fortune!

Where there’s public money, corruption inevitably follows. The representatives of Hull, Gloucestershire and other affected areas have legitimate needs, but how could they resist the temptation to absorb at least some general backlogs in repairs and maintenance into the cleanup budgets? Shortfalls in funding – real or manufactured – may then become a convenient scapegoat for general failings.

And if there’s a hardship fund for uninsured individuals, the same applies. The insurance industry has ways (albeit imperfect) to detect and deter fraud. Taxpayer-funded schemes lack the expertise and manpower to detect either fraud or real hardship, so it’ll be the professional con-men who stand to benefit most from public money.

That at least could be alleviated if distribution of the public funds was outsourced to the insurance industry. Except of course, they’re already working flat out to deal with their own business.

Posted on July 27, 2007, in floods, politics, rants, uk. Bookmark the permalink. 3 Comments.

  1. Nick, I have been led to believe that it is common for governments not to insure themselves against this kind of thing because it is cheaper to foot the bill.
    And individuals would be mad to rely on government bailing them out. Government largesse, like the wills of elderly relatives, shouldn’t really be factored into your plans for financial security.

  2. Danny, agreed, that makes sense in the narrow view: the taxpayer’s pocket is as bottomless as the insurance industry’s, and it saves the latter creaming off fat profits.

    But involving the insurance industry has benefits, too. Most importantly, it means someone is keeping an eye on the risks involved in building and other land-use decisions. Someone with a direct stake in that risk, as opposed to NotOnMyWatch / SomebodyElse’sProblem politicians or safe, salaried civil servants.

  3. Danny is right. Most public sector bodies “self-insure” because it’s significantly cheaper to stand the cost of the occasional disaster than it is to pay premiums for all risks on all assets: perfectly reasonable and sound for large bodies with vast numbers of assets (many high risk, therefore costly to insure) and a triple A credit rating. This is done routinely by many large private sector companies too.

    So the use of taxpayers’ money to restore publicly-owned property is quite proper in these circumstances. Also, the UK public sector has pretty good risk management procedures these days.

    Having some experience of working in the public sector, I can say that corruption is not rife and most public bodies work hard to detect and prevent fraud. In fact, part of my current job is to do just that, and this week I’ve been advising on a scheme to provide limited emergency support for small businesses hit by the Gloucestershire floods in this very context. I wouldn’t pretend that fraud doesn’t happen – of course it does and I expect it always will – but we do take reasonable steps to limit the possibility.

    As far as fraud is concerned I’ve seen far dodgier practices in my private sector career (Enron, Maxwell and others come to mind, but there’s a lot going on at the smaller end of the scale too, perpetrated by directors, owners and employees alike).

    You’re right that insurers try hard to detect and prevent dishonest claims, but by the industry’s own admission insurance fraud is a growing problem. I wouldn’t point the finger at either public or private sector competence over this, but rather an attitude amongst a significant minority of people that it’s all right to rip off your neighbour through fraud against the taxpayer, the insurer, business or an employer. It’s seen by too many people, wrongly, as a “victimless” crime.

    As far as uninsured individuals are concerned, I have little sympathy. Private individuals (except for the ultra-rich) cannot spread the risk across 1000s of assets worth £billions, so insurance makes absolute sense for them. I don’t think that taxpayers money should be used to pay for private individuals or organisations that cannot be bothered to cover themselves.

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