If you were a fly on the wall at a strategy meeting of any of the UK’s insurance giants, one topic you are bound to hear on the agenda is climate change, and more specifically global warming.
Climate change is one of the biggest issues facing the household insurance industry today, but we all live with its effects everyday. Everyone – individuals and businesses alike – needs to prepare for the impacts in years ahead. Insurance is at the front line of climate change as major events like floods in 2000, Boscastle in 2004, and more recently Carlisle and the Birmingham tornados in 2005 have demonstrated so clearly. It is, after all, insurance companies that will have the responsibility of dealing with many of its consequences. And it is insurers who must be equipped to analyse the new risks resulting from climate change and to help to protect customers from the impact of these risks. Anyone selling insurance should be aware of the potential impact of climate change. In fact, as a broker, a knowledge of the likely impacts of climate change can help you recommend the most appropriate insurance policies to protect your clients.
Impact of global warming
Think of a typical British Summer and you imagine a scene of the Great British public on beaches, bravely eating ice-cream in near-Arctic conditions – far from the tropics that we have seen this Summer, with temperatures soaring to over 30 degrees. Although you might think the weather we’ve had this year has been out of the blue, hotter and drier Summers are likely to become the norm in years to come. The Winters will also be affected.
Temperatures are rising across the globe and there is increasing amounts of evidence to suggest that this is happening much quicker than anyone had anticipated.
In a nutshell, increased temperatures mean British Summer time will be warmer and drier. This will result in drier soil, which significantly increases the risk of subsidence – something which cost the insurance industry £292 million last year alone. Indirectly, a hotter climate will also lead to increased frequencies of extreme storm events, flash flooding and hurricanes and may impact on the frequency and severity of fires.
Last year there was a record 27 named storms, of which 15 were hurricanes, with Katrina and the tsunami having a massive impact on travel insurance. And while it may not be immediately obvious how events that happen half-way across the world have an impact on the UK home insurance industry, one only has to apply the chaos theory to imagine the rippling affect on the industry worldwide.
It is estimated that the hurricane in New Orleans cost over $50 billion, hitting both insurance and reinsurance companies hard. In an ever-changing climate it is more important than ever for reinsurance companies to claw back their losses which they do by increasing their premiums. Clearly a volatile climate also dictates that insurance companies need to share the risk, so in order to meet the increased reinsurance premiums they will increase their customers’ home insurance premiums.
Shifting weather patterns have already begun to affect UK insurers’ customers and therefore the insurance business. Damage resulting from Boscastle in 2004 and Carlisle in 2005 ran into tens of millions of pounds. In insurance terms, perils most likely to be affected by climate change are subsidence, floods – coastal and riverine – storms and fires.
Subsidence
Global climate change has raised awareness about subsidence and with Summers becoming increasingly dry and warm the next event may be just around the corner. A report from the Association of British Insurers (ABI), ‘A Changing Climate for Insurance’, predicts drier Summers with soil moisture possibly reduced by 40 per cent by the 2080’s. By 2050, the annual average cost of subsidence claims could increase from £300 million to £600 million, with an extreme year costing £1,200 million.
In order to protect your reputation and ultimately safeguard your professional indemnity insurance it is important that you recommend a policy which offers suitable cover for subsidence – especially if the ABI's predictions ring true.
Although the majority of policies will provide cover for subsidence it is common for policies to impose a higher excess which is something you should make your clients aware of at point of sale.
Floods
For many people, flooding is a fact of life. There are more than two million homes at risk from coastal or inland flooding (10 per cent of total homes in the UK), and around 400,000 homes at very high risk of flooding (greater than 1.3 per cent annual probability or 1-in-75 chance).
This situation could worsen. Climate change will increase Winter rainfall, the frequency of heavy rainfall, and sea levels and storm surge heights. The ABI predicts that with no change in government policies or spending, climate change could increase the number of properties at risk of flooding to around 3.5 million.
Some home insurance policies impose contents limits of just £40,000. Furthermore, a large number of policies rely upon the customer – or indeed the broker – to estimate the rebuild value of their property. Currently just 7 per cent of providers in the buildings insurance market and 4 per cent of providers in the contents insurance market provide unlimited cover.
Buildings claims registered with Halifax Home Insurance resulting from Carlisle cost on average £50,000 per incident. This shows how important it is that you and your clients make an accurate estimation of the buildings costs. It's worth considering recommending home insurance policies that provide unlimited cover on both buildings and contents thus taking the onus off the customer – or indeed broker - to do the calculations. With an unlimited policy there is no risk of your clients being underinsured in the future.
Storms
According to the ABI, even quite small increases in the intensity of storms could increase damage costs by at least two-thirds by the end of the century.
The most extreme storms could become even more destructive, leading to losses greater than we have seen before. Insurance markets could become more volatile, as the expanse of capital required to cover such events increases.
As storms can be incredibly destructive, it’s best to look for policies that provide unlimited cover to ensure that your clients are fully protected. It’s also important to ensure your clients know that it is their responsibility to take care of their home and maintain it to a high standard as wear and tear is a general exclusion across all home insurance insurance policies.
Fires
Both the frequency and severity of fires is likely to increase in a hotter, warmer climate. Dry conditions allow fires to spread more quickly causing wider devastation, not to mention that fires are more likely to break out in very hot conditions.
The impact on the claims service
While it’s important to check that home insurance policies provide the necessary cover for the perils discussed in this article, you must also remember that the insurance you sell to your clients is completely worthless to them unless it measures up when it comes to the claim.
Insurance is an intangible product and your clients will only understand the value of this when they make a claim. This is also the point at which the advice that brokers or sellers of insurance have given their clients could come under scrutiny. Remember, the FSA states that sellers of insurance must treat customers fairly and recommend personal insurance products that are most suitable for their needs.
Given the current climate, insurance companies must consider freak weather events and disasters in their crisis planning in order to survive. And the vast majority of insurers are rising to the challenge posed by freak weather events and delivering a first class claims service. For example, when the Carlisle floods hit, Halifax Home Insurance had a temporary incident room set up in the city within hours of the event. The incident office was set up within the local Halifax branch and trained advisers were on hand to provide advice to residents – whether insured with Halifax or not – and help them deal with the situation.
When considering whether your suite of insurance providers will make the grade when it comes to claims it’s always worth asking if they outsource their claims or whether they have an in-house claims consultancy service. It stands to reason that if the claims are dealt with in-house from start to finish the process will run a lot smoother for the claimant, ensuring they are happy – not only with the cover provided but ultimately with the seller or broker’s advice.
On a closing note, climate change is likely to have a phenomenal impact on the household insurance industry. As providers and sellers of insurance products it is our responsibility to ensure we recommend personal insurance deals that best suit the needs of our individual customers, and, that as an industry, we work together to analyse the new risks resulting from climate change and help to protect customers from the impact of these risks by providing substantial products and first class claims services.
