Not So Firm Foundations: Climate Change And Insurance

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As I write, I’m looking at some very grey skies and a very wet garden.

Even so, we don’t need to be professional meteorologists to see that this summer is already hotter than last year – and 2022 was, if any of us need reminding, the warmest year on record.

Things in the UK may not, of course, be as extreme and as damaging to life or property as the heatwaves which continue to bring such discomfort to mainland Europe.

Nevertheless, we should remember that change in the patterns of the passing seasons has an increasingly important bearing on the work of the insurance industry.

My colleague Eleanor Moore penned an article on this ‘blog last September, in fact, about the effect of climate change on home insurance claims.

It is something which has recently occupied my time too, having read of developments in the United States, where a number of major companies have decided not to offer new insurance policies for homes and businesses in states, such as California and Florida, at risk of wildfire or hurricanes.

According to one insurance multi-national, MunichRe, the total cost of damage caused by wildfires worldwide between 2018 and last year amounted to £54 billion.

In this country, global warming is an increasing feature in claims which I and my industry peers handle throughout the year.

For instance, the Association of British Insurers (ABI) released new data in March showing that dealing with the substantial problems posed by subsidence last year alone would cost £219 million.

Its figures revealed that last summer’s heatwave resulted in 18,000 subsidence claims – roughly one every 15 minutes during the last six months of 2022.

Another piece of research underlined how subsidence is a growing concern. The number of such claims made last year was up more than two-thirds on the previous 12 months.

Even so, there are commentators who believe that subsidence is not the biggest climate-related challenge confronting insurers and policyholders alike.

A report issued by the Bayes Business School last month predicted that one-in-six properties in England will be affected by flood risk by 2050.

There are, of course, practical steps which can be – and, indeed are being – taken to mitigate the physical risk.

Just 24 hours after the Bayes Business School study saw the light of day, the Government pointed out that annual spending on flood defences had increased by 36.8 per cent (£777 million to £1.06 billion) in the three years to 2021.

Yet such work doesn’t necessarily cover the exposure of householders whose properties may be damaged by a deluge or the insurers who provide them with cover.

It’s one reason why FloodRe was created in 2016.

It is what’s known as a ‘levy and pool’ system, whereby insurers providing home and contents cover pay into a central fund and can choose to pass the flood risk part of those policies to FloodRe for a fixed price.

If you need to make a claim, your insurer will pay out and FloodRe reimburses the insurer from the central fund.

That means that home cover in areas most at risk – if available – isn’t prohibitively expensive and doesn’t undermine the operation of the insurance industry either.

Even if we allow for occasional summer downpours, such considerations may seem a long way off right now.

However, it won’t be too many months before rain becomes the order of the day once more and the issue of subsidence and inundations are the cause of very real and immediate headaches for many people across the UK.

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Written by Joe Hooper, Corporate Client Executive

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