Forecast brightening

The earth is a complex and dynamic system and, on a global and regional scale, there has always been climate change. Historically, the pace of change has been slow and has resulted from natural causes associated with the evolution of the planet and the solar system.

Today, the phrase 'climate change' is generally used to describe the changes that have occurred since the early 1990s, mainly as a result of human behaviour rather than natural phenomena. It is now widely accepted that, since the industrial revolution, human activity has resulted in an increase in the natural greenhouse gases present in the atmosphere, especially carbon dioxide. This has enhanced and continues to enhance the ability of the atmosphere to trap heat and is causing global warming, an increase in the average temperature of the surface of the earth. It is also argued that the rate of change is increasing and that there could be quite dramatic effects on the global and UK climate over the next 100 years.

The rate at which change will occur and the precise effects are uncertain. What is certain is that there are considerable challenges and opportunities facing the UK insurance industry in coping with this change.

The claim profile is changing. Winters are becoming less cold and more temperate and it is now almost 10 years since the industry was faced with a major freeze and consequent surge in burst-pipe claims. This last occurred in Northern England and Scotland over Christmas and new year 1996/1997, and was a reasonably frequent occurrence in years beforehand.

Conversely, flood claims rarely troubled loss adjusters, except in specific well-known riverside or coastal locations but, in the last 15 years, the incidence of localised or regional flooding has increased and it has become almost impossible to predict where these events might occur. The Midlands flooding (Easter 1998), Towyn (1990), Llandudno (1993), Yorkshire and the South East (2000), Boscastle (2004) and Carlisle (2005) all bear testament to that.

There is also no doubt that there is an increased incidence of localised and/or less high-profile flooding generally caused by local watercourses or man-made drainage being unable to cope with the volume of surface water run off during periods of torrential rainfall.

Global effects

The current effects of climate change can also be seen elsewhere in the world. The most devastating and high-profile Atlantic hurricane season for years was experienced in 2004. Over just a few weeks, Hurricanes Charlie, Frances, Ivan and Jeanne wrought havoc across the Caribbean and Florida. What was unusual was the similar development pattern and path of each hurricane and the relatively short period over which they all occurred. It was the first time since 1886 that four hurricanes had hit one US state. The season was one of the deadliest and costliest Atlantic hurricane seasons on record, with 3132 deaths, approximately US$42bn (£23bn) in damage and, overall, hundreds of thousands of insurance claims.

This is not the start, however. Hurricane activity and damage has increased in recent years, in particular from 1989 onwards. For instance, Antigua in the north-east Caribbean has been struck four times in the last 10 years (Hurricane Luis in 1995; Georges in 1998; Josie and Lenny in 1999) and the Bahamas, four times since 1992 (Hurricane Andrew in 1992, Floyd in 1999, Michelle in 2001; and Frances in 2004).

What can be drawn from the industry response in Antigua? There are some Caribbean insurers that now consider very carefully whether to underwrite business in the north-east Caribbean, where much of the damage caused by hurricane activity has occurred in recent years.

Others, however, take a more proactive approach and offer premium discounts to homeowners who incorporate hurricane-resistant features into the construction of new homes or during refurbishment work. In contrast, throughout much of the Caribbean, insurance against hurricanes has always had to be specifically purchased and, for those who opt to do so, cover is subject to a significant deductible, usually 2% or even 5% of the item sum insured.

Because of the spate of hurricanes that affected Antigua in the late 1990s, the population has become more conscious of the risks and the measures that can be taken in order to mitigate damage.

As a result of climate change, and the increased incidence of flood claims, there is now increasing attention in the UK towards flood prevention and flood-resilient construction. There is, however, a general lack of clarity and consistency in the approach by insurers to the issue of flood-resilient construction being incorporated within an insurer-funded flood reinstatement programme and the betterment issue that arises. It is understood that one UK insurer is encouraging its loss adjusters to try to have its policyholders incorporate flood-resilient construction techniques during reinstatement of damage, yet has made it quite clear that it is unwilling to contribute towards any additional cost that may be incurred.

While it is accepted that this does not accord with the principle of indemnity, there are other occasions when insurers are prepared to fund the additional cost of betterment, for instance to comply with statutory requirements under a public authorities clause. Clearly, some incentives will need to be provided if the industry approach is to keep up with the potential pace and consequences of climate change.

Ultimately, it will be insurers and their underwriters that decide what they are prepared to cover and on what terms, but an holistic view needs to be taken and a consistent approach agreed within the industry towards the provision of flood insurance, flood prevention and flood-resilient re/construction.

Expectations of policyholders

In parallel with climate change and the increasing risk of trauma-type incidents, there is also no doubt that policyholder expectation, in terms of the diversity and range of services provided by their brokers and insurers, continues to rise. Moreover, in the event of regional or local catastrophe, media interest is heightened and there is often a great deal of talk among affected residential and business communities in the aftermath of an incident such as those in Boscastle or Carlisle, regarding the effectiveness or otherwise, of the industry response. Without question, the industry must continually exceed rising policyholder expectation and deliver a quality service if the brokers and insurers concerned are to increase client retention and improve market share.

There is no question that climate change and the increased severity and frequency of localised disasters represents an opportunity for brokers to cement relationships with their client base and build powerful reputations in the affected residential and/or business communities. These reputations will not only maintain market share but accelerate growth. Localised knowledge and empathy have been key criteria in the broker versus direct writer battle for market share. There can be no better illustration of the tangible value of these broker-based strengths than a localised disaster.

So what can be done by brokers before and after such events, to assist their clients and build reputation?

Well-developed pre- and post-loss strategies ensure that trauma claims are handled swiftly and that the appropriate decisions are made as early as possible in the claim process, to facilitate repair and reinstatement as quickly as possible. Planning is the key.

In the event of a major incident, from a commercial perspective, businesses that have given no prior thought to disaster recovery/business continuity planning are at an immediate disadvantage. Larger businesses tend to be better prepared, but many of the SMEs typically serviced by provincial or high-street brokers are much less so, such that the immediate response can be hampered. Recent statistics released by the Chartered Management Institute state that only 10% of UK businesses have a disaster-recovery plan. Pre-loss advice on disaster recovery therefore represents a significant untapped market for the broker, either in the form of organic growth within their existing client base or as a marketing tool to generate new business opportunities.

While many of the national and some larger provincial brokers have in-house risk management and claims expertise, some provincial and many high-street brokers do not. Loss adjusters can, however, work in partnership with these brokers and their key clients to develop pre- and post-loss strategies, which help add a competitive edge and ensure that claims are dealt with quickly and to a high standard.

Post-loss, regardless of broker size or in-house claims expertise, the key to executing a well managed claim and recovery process is regular, clear communication between all parties. This is the broker's opportunity to act as a pivotal point in the process, to ensure that both policyholder and insurer interests are appropriately served and broker and insurer reputations are enhanced.

The domestic market is largely dominated by insurers and the success of their response to catastrophe-type incidents and trauma-type claims can vary. This is often dictated by the effectiveness of any catastrophe plans in place, their chosen loss adjusters and any supply chain utilised. Brokers can and should look to an insurer's catastrophe response reputation when placing cover. Once placed, while it is difficult for brokers to directly influence the insurer's response processes, they can influence the choice of adjusters and suppliers to ensure high service standards.

Domestic policyholders experience the true value of their insurance cover in a crisis situation. As experienced in Boscastle and Carlisle, expectations are high. These claim situations represent an opportunity for brokers to increase client retention - providing the client experience is positive. A local presence, together with regular, informed communication, will assist with a policyholder's trauma and cement the relationship with their broker as an invaluable source of support in the claims process.

Building reputation

Brokers can build their domestic reputation by proactively assisting homeowners with pre-loss risk management and post-loss mitigation advice. Branded risk management fact/advice sheets containing information based on a combination of the broker's knowledge of the area and the associated risks, together with technical expertise, could be used for localised marketing and supplied to existing clients with their policy documents.

Equally, brokers can take advantage of local press and radio to provide generic post-loss mitigation advice to the domestic community. Readers or listeners could be directed to the website for further information and to obtain a free post-loss fact/advice sheet. This would not only build a local profile for the broker but generate a database of prospects for future contact. Relationships with existing customers could be strengthened by prompt mailing of the fact/advice sheet, along with a specific contact number dedicated to the disaster and resulting claims.

While the extent and rate of climate change and the potential consequences remain unclear, there can be no doubt that those in the insurance industry and, in particular, those brokers that seize the opportunity to do more in the event of local and regional disasters, will not only be seen to be rising to the challenge, but will flourish as a result.

Russell Crewe, Unit partner, national operations, Ashworth Mairs Group.

PREDICTED EFFECTS OF CLIMATE CHANGE

Global

- Worst-case prediction is a rise in temperatures by 7 degs-10 degsC by 2100 - devastating in such a short period of time.

- More conservative predictions are that global average temperatures are to rise between 1.5 degs and 6 degsC by 2100.

- Sea levels to rise as ice melts.

- Increase in winter precipitation in northern mid to high latitudes; decrease in winter precipitation in southern latitudes.

- More extreme precipitation events.

- Hurricanes likely to be more intense.

UK

- Summers to be drier and winters to be wetter.

- Annual average temperatures to rise by 2 degs-5 degsC by 2080s. Greatest rise in the South and East, least in tthe North and West. Most warming in summer and autumn.

- Winter rainfall to increase, particularly in the North and West; less snow.

- Cost of flooding could increase 20-fold, from circa £1bn to more than £21bn by 2080s.