Flooding, Climate Change, And Its Impacts On The Insurance Industry

Flooding, Climate Change, And Its Impacts On The Insurance Industry

In the middle of June, the River Steeping in Lincolnshire burst its banks following heavy rain, and more than 580 homes in the Wainfleet area were evacuated.  Flooding directly affected about 130 homes, and 1,000 people were unable to return to their homes two weeks later.

These increasingly regular cases of extreme weather which are hitting the UK are deeply upsetting for the people directly affected, and very unnerving for everyone else.  The financial impact will affect everyone in the short as well as the long term and the trend is already having a cost impact on insurers.

The Association of British Insurers reported that the cost of the extreme freeze which hit the UK in early 2018 resulted in a record £194 million pay-out in a three month period for burst pipes.  This was followed later in the same year, by an extreme heatwave which led to more than 10,000 households making claims for damage due to subsidence, adding a further cost to the insurance industry of £64 million.

A director of Samuel and Co Trading warned that the only sustainable option for insurers would be to adjust their risk prices accordingly.  The knock-on effects of rising premiums could well pose a threat which could become a social issue as “affordability is so critical for people on low and average incomes”.

It is not possible to prove that a single event is the result of climate change, but if in the future, insurers conclude that climate change was a contributory factor to the event, companies will need to think “carefully about the pricing and availability of similar insurance policies”.

Jessica Turner, catastrophe advisory senior vice president at Guy Carpenter, explained why even the summer months are not immune to severe weather events.  Flash flooding can be the result of the land surface heating up during the day, causing powerful updrafts and convective storms. These lead to large bursts of rain falling within short periods of time.  Climate change and an increase in urban development are contributory factors to surface flooding. Drainage systems, installed in the 1800s and frequently not updated, can be overwhelmed by the increased rainfall on paved surfaces, which cannot absorb the water. 

Jason Smith, CEO of MoneyExpert said it was really important people checked they have adequate cover for any major repair and building costs.  They should also update the value of contents in their property, to ensure they can be replaced if destroyed or damaged beyond use, in either a major fire or flood

Another warning came from Ben Stansfield, a partner in law firm Gowling WLG.  There will be more climate change related damage, caused by unpredictable storms with greater power, leading to building damage and power line failure. (With increasing numbers of electric vehicles, it is key to improve energy storage).  Droughts will cause ground shrinkage, cracks and subsidence.

The financial industry are voicing considerable concern over the impact of climate change on the cost of insurance premiums and the difficulty of providing affordable protection globally and the UK, for natural disasters.  

ClimateWise is the name of a global insurance industry collaboration, of which the ABI is a founding member.  Their Director General, Huw Evans said recently “Insurers are on the front-line dealing with the results of rising temperatures and changing investment needs, and understand better than most the serious implications of a changing climate.  A sustained and ambitious response is needed to protect homes, businesses and communities around the world. The UK needs to build its resilience to severe weather: vital flood defences must keep pace with climate change, and help given to people to improve their own protection”

Let us hope global finance is able to apply pressure to governments to act faster on climate change.  In the meantime, customers should check their own insurance policies are adequate to protect them again an extreme weather event.

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