Who's Going to Pay the Bill?

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Consider these sobering statistics. In the 1999 floods in Bavaria, which caused $416 million in damage, the insured share of the loss was less than 10%. And when parts of the Czech Republic were flooded in 1997, wreaking almost $2 billion in destruction, insurance covered only 20%. "There will undoubtedly be substantial economic loss caused by the current flooding, but the insured loss is expected to be significantly lower," says Ivo Menzinger, head of the Flood Group at the insurance giant Swiss Re in Zurich. "This is largely due to the low penetration of flood insurance in the main affected areas of Austria, the Czech Republic and Germany."

In Britain, flood insurance is generally built into a standard "home-contents cover" package. Elsewhere in Europe, however, this type of insurance is sold separately. As a result, only a small number of people affected by the heavy weather may be insured against it — and even then, their coverage is unlikely to stretch very far. In Germany, which has so far sustained an estimated €7 billion in damage, fewer than 3% of all households are covered for floods. Things are better in the former East Germany, where old state-run schemes offered flood cover as standard, and some of those policies are still in effect. In Austria, about half of all insured households are covered for floods — but only up to between €5,000 and €10,000 per home. The Austrian Insurance Association estimates insured losses for this disaster will be in the region of €100 million, while total losses could hit €3 billion.

The onus will be on European governments — many of which are already short of cash — to pick up the tab. It won't be easy: last week Austria said it may have to delay tax cuts and trim defense spending in order to meet flood expenses. Germany has authorized a relief package, comprising 1400 million in aid as well as loan guarantees. But such measures could leave Germany and other countries in breach of the conditions of the European Stability and Growth pact, which says that the budget deficit of euro-zone states cannot go above 3% of GDP. To be sure, economists say there is a provision in the pact that permits member states to breach its conditions under extreme circumstances. But even before the floods, the pact had been under pressure. Portugal has fallen afoul of deficit restrictions, and some other nations are struggling to meet them.

Nevertheless, German Chancellor Gerhard Schrφder, soon to face voters at the polls, promised that more money will be forthcoming. The European Union has also swung into action, saying it will provide up to €260 million to the Czech government. The E.U. is examining ways to release funds to Austria and Germany, as well. With water still rising in some places and many people uninsured, those affected by the floods will need all the help they can get.