Climate Change & the Property Insurance Industry
In the UK, property insurance is big business. During 1992 insurance companies issued property premiums worth over £6,000 million. If changing weather patterns can affect UK property insurance it is an issue that will concern both the insurer and the insured. Insurers are not so much concerned with averages as they are with extremes in the weather. During the last fifteen years some evidence points to an increase in the frequency and intensity of weather extremes. The availability of widespread cover and the value of property has also risen. The combination of these factors have given rise to an increase in the cost of claims as a result of weather damage.
The maritime situation of the UK means that there is great variability in the weather from day to day. The country is exposed to natural hazards such as coastal and river flooding, storms, coastal erosion, subsidence, heave and landslip, and frost. Historically, settlements and development have been situated in coastal regions and along river valleys, exposing insurers to potentially large losses. Climate change may increase the frequency and intensity of some of these natural hazards, and as a result, the cost of property insurance will rise to cover the costs of the increased risk.
Climate Change and its Effect on UK Natural Hazards
Global average temperatures are predicted to rise at a rate of 0.2 to 0.6°C per decade during the next century, although the change will not be evenly distributed throughout the world. Average UK summer temperature could be up to 2.4°C warmer by 2050. Such a global change in climate will significantly influence regional weather patterns which affect the UK, giving rise to a change in the frequency and intensity of associated weather phenomena including flooding, frost and storm damage.
Increased global average temperatures will lead to thermal expansion of the oceans and the melting of ice caps; sea levels are currently rising by an average of between 1 and 2mm each year. Over the next century, climate models project this to increase to 5mm per year. With accompanying storm surges and inundation, the threat of coastal flooding therefore increases. Catastrophic losses could be experienced if sea defences fail; the property protected by the Thames Barrier is worth over £10,000 million. In the UK a number of low-lying, coastal regions are under particular threat from sea level rise. These include the coasts of East Anglia, Lancashire, the Yorkshire/ Lincolnshire area, the Essex mudflats, the Sussex coastal towns, the Thames estuary, parts of the North Wales coast, the Clyde/Forth estuaries and Belfast Lough. Flooding results in short-term damage to physical structures such as buildings and communications. It can also produce long-term damage as a result of salination to agricultural land, engineering structures and road and rail networks.
A warmer climate in the UK will reduce the occurrence of freezing temperatures and the risk of burst pipes.
The gradual increase in average temperatures may lead to more intermittent rainfall and a drying out of soils thereby increasing the soil moisture deficit. Dryer soils increase the risk of subsidence, and as a result the foundations of older buildings will be damaged. It is the second most important hazard to property insurers in the UK; in 1990 and 1991 the actual costs incurred as result of subsidence (leading to property damage) was over £500 million.
The effect that climate change will exert on storm patterns is still an area of great uncertainty. There have been suggestions of an increase in storm frequency with warmer temperatures but there is no overall agreement on this, although some climate models do suggest an increase in storms for the UK. Insurance companies are very concerned with the return period, intensity and location of storms, because of the great losses which are incurred.
Options for the Insurance Industry
The increased risk, in particular, of flood, storm and subsidence poses problems for the UK property insurance industry. The options for action that need to be taken to ensure the insurance industry can cope with a catastrophe, or at the minimum, an increase in the number of claims made, requires careful consideration. One must remember that these are only possibilities and may never require implementation.
This is the easiest option for the UK insurance industry to adopt but in practice would prove self destructive and lead to government intervention.
Withdraw insurance from high risk areas
In high risk areas abroad, withdrawal of insurance cover has occurred after a catastrophe. This option protects the insurers' investments but excludes those living in high risk areas from cover and would potentially be a poor decision to make. Those owning property in such areas would be exposed to potential further loss and could find it difficult to sell the property without insurance available for it. Weather related incidents not only affect the insurance market; the problem extends much further, affecting financiers, occupiers, employees, the construction industry, planners and local and central government.
Physical risk management and loss control
This option would enable the individual to reduce their risk of loss by taking action before an event. This is of particular importance in the construction industry, where an effective risk management strategy should form part of any development proposal prior to construction. Local planning authorities, building contractors, buildings standards regulators and insurers should all be involved together in developing and implementing risk management strategies.
Change the type of insurance policy
An increase in claims as a result of weather related losses will result in profit reductions for insurers. The insurance industry will be forced to either a) increase the charge of a policy for the same benefits or b) provide fewer benefits for the same price. Property owners may be forced to accept this type of change in policy if there is no other option available. One could say that higher premiums are better than no cover. Potential measures that could be adopted include an increase in the deductible fee (the loss paid by the policy holder before invoking insurance), co-insurance (requiring the cost of the risk to be shared proportionately between the policy holder and insurers), a simple rise in cover or district rating schemes where high risk areas would be made to pay higher premiums.
The insurance industry can play its own role in reducing emissions of greenhouse gases. Insurers could create a rating system which penalises the excessive consumption of heating and energy. Insurance companies could also reduce investments in energy intensive industries and alternatively invest in organisations whose aim it is to reduce greenhouse gas emissions.
In the UK the three most important natural hazards are flood, storm and subsidence. Climate change could influence the pattern of these events but at present scientists cannot say how severe and in which locations these events might take place. Potential future losses could be minimised by the implementation of measures by local and central government, statutory bodies, planning authorities, the construction industry, architects and property owners. Co-operation at an interdisciplinary level could keep any increase in premiums to a minimum, and would enable the increased cost to be shared between those involved.