Stormy weather

Climate change poses a real threat to the insurance industry. A growing body of evidence shows that more extreme weather is being experienced, bringing with it increased claims for weather-related damage.

Climate change is leading to a more dangerous and unstable world according to Climate Change 2004, a report published by the Benfield Hazard Research Centre. According to the report, global temperature is accelerating rapidly and signs indicate that the critical point at which significant warming and its consequences can be avoided has passed.

The report's author, Professor Bill McGuire, director of the BHRC, says: "The earth will be a far more hazardous place, experiencing extreme meteorological events - with floods, droughts, wildfires and heatwaves becoming more commonplace. The insurance industry must be prepared to face progressively rising losses as extreme river and coastal flood events become increasingly prevalent.

"There is little doubt that the UK is seeing more extreme weather, with record temperatures and heavy rainfall leading to increased incidences of flooding and subsidence."

A 2002 government report, Climate Change Scenarios for the UK, predicted that the wetter winters of the last 200 years will continue to get wetter, with an increasing number of heavy rainfall days. The number of winter storms crossing the UK has also doubled in the last 50 years.

In addition, there has been an increase in extremely hot weather. In the 1990s, there were 34 months of extreme hot weather, compared with a previous average of just 12 months per decade. Estimates indicate that more than 2000 people lost their lives as a result of the heatwave last summer, with nine days in August 2003 exceeding temperatures of 30 degC.

The Association of British Insurers has highlighted the implications that climate change is having on insurers and their customers. Its report, Changing Climate for Insurance by Dr Andrew Dlugolecki, reveals a changing pattern of claims arising from a greater incidence of extreme weather.

It predicts claims could treble if no action is taken.

Weather-related claims on property insurance have doubled to over £6bn between 1998 and 2003, compared with the previous five years. Other sectors of insurance, such as health, motor and liability insurance could also be influenced by changing weather patterns.

John Parker, head of general insurance at the ABI, says: "Managing risk is central to our industry, and insurers must be equipped to analyse the new risks arising from climate change and to help customers protect against them."

Flooding

The ABI has stated that its members will continue to provide flood insurance for as many domestic properties and small businesses as possible. Under the ABI's Statement of Principles on the Provision of Flooding Insurance, insurers will maintain flood cover for homes and businesses already insured, as long as flood defences sufficient to meet the government's standards are completed on schedule by 2007. It states that the cost of premiums and excess charges will be competitive, but will also reflect the risk of flooding. The statement also calls for improved security for those living and working in high-risk areas and for new provisions for those who wish to sell their homes or businesses.

The government recently reaffirmed its commitment to maintaining and improving the UK's flood defences. The ABI is now calling for detailed reassurances about the level of spending over the next three years.

Despite the commitment to improve flood defences, there remain properties that are uninsurable. Ray Cox, UK director of underwriting at Royal and SunAlliance, says: "We have signed the ABI agreement and, with regard to high risks, we do our best to continue to provide cover for existing customers. However, if it is a new customer we may not wish to underwrite it."

However, he argues that there are ways to manage most risks. For example, in commercial premises stock can be stored so it can easily be moved in the event of a flood warning. Electrical points can be located high on the walls. Some businesses in vulnerable areas may even want to build flood walls. "Increased excesses are often a good incentive to the insured," he says.

Cox adds: "Brokers will normally be able to find some form of cover and uninsurable risks are very rare. Brokers can use in-house expertise to help the client or work with the insurer to access expertise. Brokers also have knowledge of the market and are able to shop around as different insurers have different attitudes to flood risks."

Insurers are starting to use more sophisticated technology to help them assess the risk of flooding at individual properties. For example, RSA is able to determine the individual risk of flooding and subsidence for every home in the UK. It uses its own geological engineering risk techniques, geographic information system, digital terrain-mapping and address verification information from Ordnance Survey. During the next 12 months RSA plans to further develop its risk mapping system to also include storm damage.

Cox says: "In the last 20 years, we have had more extreme weather. Insurers have to be alert to the emerging pattern and need to respond accordingly. It is a double-edged sword as, in addition to floods, we are seeing increased incidents of subsidence. Our risk management enables us to offer affordable household insurance to people who may wrongly be perceived by others to be a high risk."

In addition to an increase in weather-related claims, insurers are also seeing an increase in the value of the claim. Cox says: "We are suffering from the concentration of volumes in properties, nowadays people have fitted carpets and more electrical goods and the value of claims has risen significantly."

The Chartered Insurance Institute has published a report on flood risks and their insurance on its website. The report shows how the risk is growing in terms of hazard, exposure and vulnerability. And, it is not just property insurers who will face greater challenges presented by floods. One area highlighted is the potential impact on professional indemnity insurance, especially the implications of the new Housing Bill in England and Wales and the requirement for sellers' packs, which will be expected to indicate future flood risks. It questions whether the surveyors who prepare such packs will be able to obtain professional indemnity cover.

The Bureau of Insurance Services insures houses that most companies decline through its flood insure scheme, created to consider the insurance of properties that have suffered flooding.

Chris Jordan, head of insurance at BIS, believes there are around two million properties deemed to be in flood-risk areas and says that flooding is nearly twice as frequent as it was 100 years ago.

BIS advises clients on the risk of flooding in their area and will look into whether any work has been or is being carried out by local authorities, government or the Environment Agency. If appropriate, BIS surveyors can draw up specifications of works that, when implemented guarantee BIS will find insurance.

Jordan says: "This is not just an insurance problem but a social problem. When buying a property, insurance is probably the last thing on the purchaser's mind. Yet, without full insurance (or an excess higher than £2500) mortgage companies are unlikely to advance monies. Without a mortgage a property can only be sold to a cash buyer. As a result, homes that do not qualify for full insurance can suffer a drop in value of around 20%."

Subsidence

An estimated 3.7 million homeowners live in areas susceptible to subsidence, with London, South East and Midlands' homeowners most at risk from subsidence.

Cox says: "Many of these may be paying over the odds for insurance, even if their home has never suffered from subsidence, because their insurance company only looks at information on an outward postcode, which typically comprises 300 properties, but systems are becoming available to pinpoint each individual property."

BIS also offers insurance for properties impaired by subsidence. Subsidence also diminishes equity but, again, Jordan argues that there are steps the insured can take to reduce the risk. BIS has produced advice leaflets that are available free of charge to help brokers and clients to manage the risk of subsidence and flooding. For example, if there are large trees near a property, its owner should seek advice from their local authority tree officer about regular pruning, particularly in areas in which there are clay soils.

Research by the Building Research Establish-ment suggests that detached properties have a greater susceptibility to subsidence. Properties built prior to 1900 are less prone to damage than those built thereafter. Oak trees are the most damaging species of tree. Tell-tale signs of subsidence include diagonal cracks, wider at one end than at the other, appearing in the walls around doors and windows, cracks wider than 5mm and floors that are beginning to slope.

Jordan adds: "We believe it is possible to reduce the number of subsidence claims. Virtu-ally all cases of subsidence are caused by external influences, for example, trees and leaking drains inter-reacting with clay soils. It is estimated that around 70% of all subsidence claims on shrinkable clay soils were attributed to the removal of water by trees or shrubs close to the property."

Motor

The increased incidence of extreme weather has also had an influence on motor insurance. A survey by WNS Assistance revealed that winter rain- or snow-related motor accidents have almost tripled over the last six years throughout the UK. Road accidents in which rain, hail, sleet or snow was cited as a contributory factor increased year on year from 8.7% in the winter of 1998-99 to 23.4% in the winter of 2003-04.

Rain-related motor accidents are equally on the rise during the summer months. In the summer of 2002, the number of motor accidents in which rain was cited as a factor grew to 6.9% of the total. This compares to 5% the year before and 4.4% and 4.9%, respectively, in the previous two years. Rain-related motor accidents last summer were up, at 6.7%.

Tim Rankin, managing director of WNS, says: "There is a definite increase in road accidents in which rain or snow played a significant part. What is particularly disturbing about the results is that the number of motor accidents related to precipitation is on the increase almost irrespective of the yearly rainfall figures. This suggests the problem is related to the ferocious downpours that now seem to be dominating our weather."

As the weather gets wetter, hotter and stormier, claims will continue to rise, impacting on home, motor, property, health and professional indemnity insurance. Brokers can provide valuable expertise to help customers manage their risk and knowledge of the insurance market and ensure that, for most cases, risks remain insurable.