Apocalypse now?

Climate change is upon us. Our cities may not be underwater yet and humanity may not be reduced to the Stone Age, but the long heralded phenomenon of global warming has begun. According to the Climatic Research Unit (CRU) at the University of East Anglia, in the last 100 years, the average temperature of our planet has increased 0.8 degrees and global sea levels have risen 20cm.

The Day After Tomorrow it is not, but mother nature is biting back. The 2005 Atlantic hurricane season was the worst in recorded history with a record 28 tropical storms forming, of which 15 went on to become hurricanes causing widespread devastation across the southern US and Central America.

2005 also saw Europe suffer its first encounter with a tropical storm when Hurricane Vince formed 515 miles east of the Azores, much further north and east than is usual for hurricanes and in waters colder than those previously thought necessary for the creation of a hurricane.

Blowing in the wind

Besides Vince, Europe was also lashed by two severe windstorms, one of which blasted Northern Ireland and north-western Scotland with windspeeds of up to 124mph. Events such as these inflicted insured losses of $1.2bn a year between 1990 and 1998. In 1999 three windstorms alone caused insured losses of over $10bn according to the Bermuda Biological Station for Research. European windstorms rank second only to US hurricanes in terms of natural catastrophe insurance loss.

While no evidence exists to suggest that the increased incidence of windstorms hitting the UK is related to climate change, there are signs emerging that warmer oceans are breeding deadlier hurricanes. "What we have seen since the 1970s is an increase in category four and five hurricanes and the conclusion is that the ocean is warmer and the storms are able to feed off it," says Professor Phil Jones, director of the CRU at the University of East Anglia.

This trend is not only a worry for reinsurers in the US but also for the UK insurance industry. "European windstorms grew in number between the 1960s and 1990s although the last eight years have been quite quiet. We also saw strong periods of activity during the 1890s though so we cannot arbitrarily attribute this trend to climate change," adds Mr Jones.

Despite the destructive power of such storms the economic impact they have on the UK insurance sector is manageable since they tend to strike Northern Ireland, north-west Scotland and the Hebrides - sparsely populated areas with little of the dense infrastructure seen in the South-east or North-west of England. Although insurers have not taken a major hit in recent years, there is plenty of nervousness about the robustness of their disaster scenarios.

"Catastrophe reinsurers do a lot of modelling to assess their potential liability should a major storm hit. We're seeing the effects of climate change elsewhere but not so much here in the UK, so we cannot price for it yet, otherwise we'll make ourselves uncompetitive," says Tony Hutchins, commercial property manager at Allianz Cornhill. "Whether the reinsurer models are accurate is another matter but windstorms are becoming more common and we have to build that into our premiums."

Reinsurers themselves admit they have been lucky not to have to put their models to the test yet. "We haven't had any event on which to test our European catastrophe models so we don't know how accurate they are," says Richard Morgan, managing director of Guy Carpenter. "Even so, over the last decade we have seen a lot of consolidation in insurance so I think we're positioned to deal with a sizeable event."

Into the Ark

After incidents at Boscastle, Carlisle, and the widespread flooding across England in 2000, the nation seems to be growing accustomed to annual flood events. According to the Association of British Insurers (ABI), up to two million homes in the UK are at risk of flooding with 400,000 at high risk. This situation is set to worsen as the Government has announced plans to develop hundreds of thousands of new homes on floodplains.

The Office of the Deputy Prime Minister has given the green light to the construction of 200,000 new homes a year in the South-east of England by 2016. Over the next decade 120,000 new homes will be built along the so-called Thames Gateway, an area already prone to flooding. Given that climate change will raise sea levels by anything from 20 to 100cm in the next century and increase the likelihood of flash-flooding, many are questioning the wisdom of the decision and how insurers should respond.

"The biggest issue will be homeowner behaviour - would you buy a house that you knew was likely to flood? And if so, would you expect the house price to be discounted in some way? Such specialist situations might lend themselves to niche insurance arrangements that are the homeland of the specialist broker," says Tony Boobier, vice-president of international solutions at Marshall and Swift/Boeckh.

Mr Hutchins believes brokers have a role to play in mitigating the risks living on a floodplain represents: "If a certain area flooded two or three times in five years it might become very difficult to get insurance on that postcode. In circumstances like this only a broker would be able to use the tools at his disposal to deal with these kinds of non-standard risks."

That opportunities may exist for niche brokers is undoubtedly good news, but for insurers, the implications are not so positive. Warmer waters around the UK will raise the likelihood of summer flash floods like those seen at Boscastle in 2004. A torrential downpour along the Thames estuary would see water that would otherwise soak into the floodplain running off concrete and into drains and into the Thames far faster than it otherwise would. The river level could rise to breaching point within a matter of hours.

In a scenario similar to the great flood of 1953, a windstorm could cause a tidal surge to race up the Thames from the North Sea. While raising the Thames Barrier would adequately protect the city inside it, the surge would effectively be stopped dead by the barrier and the excess water extensively flood the Gateway area.

The Environment Agency announced in early 2005 that plans were being considered to construct a barrier 10 miles in length at the mouth of the Thames between Sheerness and Southend to protect the whole Thames estuary. Unfortunately, there has been no further development of this plan in the months since.

To compound these problems, as well as rising sea levels, increased windstorm activity and torrential flash downpours, the south of England is actually 'sinking' into the sea. An effect called post-glacial rebound is causing Scotland to rise up away from the Earth's mantle due to the removal of the weight of glaciers that covered the region during the last Ice Age. As northern Britain rises up the south is correspondingly edging down, further increasing the likelihood of sea levels overcoming existing defences.

In response to complaints from the ABI that its commitment to flood prevention was lacklustre, in July 2004 the Government announced at least £564m in flood defence spending over the next three years. Although credit should be given to the Government for making such a commitment, it pointedly ignored the ABI's observation that: "Avoiding building new developments on high flood risk areas is the most sustainable solution for managing flood risk in the long term."

Whether or not the activities of mankind are to blame for climate change, the fact remains that the world is getting warmer and associated with that heating effect are more extreme storms and destructive weather events. Insurance will have a key part to play in softening the economic blow that these events will inevitably bring, and if the Government has been tardy in rising to the challenges that climate change poses, then that is all the more reason for the insurance industry to take the lead.

"Extreme weather is with us globally and we need to be prepared for the unavoidable local consequences," concludes Mr Boobier. "We are sitting on a weather time bomb which we need to plan for and the sooner we start, the better."