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Home > Insurance Markets Best Practice > Climate Change and Insurance

Insurance Markets Best Practice

Climate Change and Insurance

by Stephen Haddrill

Executive Summary

  • A discussion of the likely impact of climate change

  • The scenario 50 years on

  • Present responses to extreme weather

  • Insurance sector agreements with government

  • The limits to insurance


Starting from the fact that climate change is a reality that is happening now, and that we can see its impact across the world, what role does the insurance sector have in covering this? There is no doubt that climate change is of enormous importance to the insurance industry. The costs of flooding, wind damage, and abnormal heat are all huge, and climate change threatens to increase all those costs.

Work done so far on climate change shows the threat has arrived. The carbon produced in the last century is already causing extreme weather. The scientific consensus is that flooding has increased in severity due to sea level rises and more rain. Wind-storms are fiercer. Heat waves are more intense. Again, the scientific consensus is that reducing carbon emissions will not reverse this trend for decades. More extreme views, such as that by the founder of Gaia theory, James Lovelock, argue that we have probably already gone past the point of no return, but this pessimistic approach is not mainstream thinking. What is clear is that both the insurance sector and the world at large have to adapt and look to protect themselves.

Failure to adapt will generate extreme economic costs. Even relatively low percentage increases in weather phenomena, such as the footprint of a flood area, lead to massively increased costs. For example, a 5% increase in the footprint of a flood can lead to a 75% increase in the consequent bill for damages.

Extreme Weather Conditions

Over the next 50 years, we expect to see:

  • Windstorm losses increase by two-thirds to US$27bn per year worldwide.

  • Additional flooding costs of €100–120 billion a year in Europe.

  • A 15-fold increase in UK flood costs, to £22 billion.

  • Subsidence costs increasing by 50% in average clay-soil areas.

At the same time, heat stress on people, animals, machinery, and property will also increase. It is quite possible that by the 2040s, the summer of 2003 will be regarded as normal. If this becomes reality, then a quarter of working hours will be hotter than “comfort levels” in London offices, increasing the demand for air conditioning, and creating heat islands.

Last year’s floods in the United Kingdom present a good example of our concerns. While it is difficult to point to one isolated storm or flood and say conclusively, “there we have proof of climate change”, the floods of 2007 nevertheless give us a picture of the effects we are facing. Torrential rain did not just lead to rivers bursting their banks. Crucially, the drains failed also, as flash flooding overwhelmed them. In all, some 180,000 people made claims, or four times the annual average of flood claimants. Another way of putting this is that the industry experienced four years’ worth of claims in just two months.

At the same time, the floods put a significant percentage of the United Kingdom’s infrastructure at great risk. Reservoir banks threatened to fail. The electricity supply to 600,000 homes was almost lost, and the water supply to those homes was in fact lost for a while—this despite the fact that the insurance industry has issued repeated warnings to government about the vulnerability of critical infrastructure.

The Response of Insurance Companies

To date, the insurance industry has coped with extreme weather events extremely well. In the 2007 floods in the United Kingdom, most insurers had loss adjusters on the ground within 24 hours, often calling in staff from overseas. People were put in temporary housing within days, and almost all are now back in their homes. Two hundred families were still displaced at the end of September, but virtually all because they required special building work.

There are, however, some lessons to learn. People talk to each other in a crisis. If a loss adjuster representing one insurer gives information to one household, while another gives different information to a neighbor, people get confused. The sector therefore came together to standardize the process of communicating with citizens in an afflicted area after an extreme weather event.

People in hard-hit areas worry greatly whether they will be able to obtain insurance again. The industry has been tremendously resourceful in continuing to provide insurance cover in “at-risk” areas, and it has done so at very reasonable premium prices. However, there is a need for governments around the world to be alert to the dangers of allowing building on flood plains and low-lying coastal areas in an era of rising sea levels.

Insurance covers risk. It is not there to cover loss that is absolutely certain to be incurred—you cannot insure your house once it is on fire! It is a fact that, in both America and the United Kingdom, and in many European countries, some of the most valuable properties, infrastructure assets, and concentrations of people live in areas that are going to be more at risk from tidal surges, flooding, and rising sea levels in the years and decades ahead.

The 2007 floods were the result of extreme rainfall. Water also threatens us from the seas, particularly as sea levels are expected to increase by at least a meter this century. If nothing is done, the risk of the 1953 flood being repeated will increase from 1 in 1000 in 2000, to 1 in 100 by 2100 (figures from the UK Environmental Agency).

The financial cost of a major storm on the UK east coast, for example, could reach £15–20 billion, as quoted in an Association of British Insurers report, “Coastal Flood Risk—Thinking for Tomorrow, Acting Today,” published in November 2006. This is not a fantastical, or a remote possibility. In 2008, the United Kingdom was just hours away from a combination of a tidal surge, strong east winds, and high water levels in the Thames causing flooding in London, according to the London Meteorological Office. The ABI report used insurance catastrophe models to examine the effects of a rise in sea levels on flood risk.

Handling such an event would be extremely difficult. A high proportion of our emergency facilities are on the coastal flood plain. It is worth bearing in mind that the number of people over the age of 75 (the least-mobile members of our community) living on the UK coast is expected to double in the next 30 years, according to ABI research.

Taking all this together, the adaptation of homes, business, and the infrastructure economy is vital for every country. Adaptation requires concerted action at an international level, and at the national level, as well as by the global insurance industry. In the United Kingdom, over the last year, the sector has worked with the whole range of public authorities to put in place a new blueprint for the future, and good progress has been made on all sides.

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