Original article by Andrew Dlugolecki, Insurance and Climate Change Consultant. Find out about likely changes to your insurance premiums as a result of climate changes.

Introduction

 

Tornado damage to a caravan in Wales. Photo by Tornado and Storm Research Organisation.

Climate change will have big effects on the insurance industry and on what you pay to insure your home. Premiums are likely to rise and some damage such as that caused by coastal erosion may be excluded from cover. It will also affect long term investment returns in the pensions and life insurance arms. Political actions to curb energy consumption must inevitably alter the economic situation of entire regions and industries that are heavily reliant on fossil fuel like coal and oil.

Sections in this article

Hot Property

Flooding

Coastal areas

Insurer Action

Asset Management

Contraction and Convergence

Where Next?

Hot Property

The risks to property from temperature changes and extreme weather are already evident in the UK. This is because insurance cover is wider in the UK than anywhere else in the world, so that almost any type of weather damage is indefinable. Owing to the excellent British weather data which extend back over 330 years, we can see that temperatures have risen significantly in recent decades.  The 1990's had 3 times the number of warm months expected from historical averages, and in 1999 every other month was a warm one! While this has a benefit in terms of fewer cold freezes, the downside is a tendency for more stormy conditions, and of course drier summers. The cost of a great storm is significantly higher than a freeze, and can reach over £1 billion, as recent storms in France (1999) and Britain (1990) have shown.

However, persistent drought is the event  which is already affecting insurers and domestic home-owners in Britain and France financially. The problem is that some common clay soils tend to shrink and crack when there is a rainfall deficit. This is exacerbated by several species of tree such as cherry and willow which are planted for their aesthetic value, but which send out vigorous roots to seek moisture in a drought. Taken together, this leads to local subsidence of the ground, and can cause serious damage to house foundations. Repairs can take many months to effect, and can cost tens of thousands of pounds. Since the clay belts are readily pinpointed, this has resulted in major geographical differentials in the insurance rates for domestic buildings across the UK. Per thousand £ value, it may cost four times as much to insure a property in southeast England, compared to say Aberdeen, just because of the drought risk.

Flooding

Recent flooding in Shrewsbury, UK. Photo: Mandy Stoker

The opposite side of the coin is flood of course, and the scientists warn us that there will be more frequent heavy rainfall events also. The floods which affected much of England and Wales in autumn 2000 provided a telling example of what this might mean. The Association of British Insurers published a report just weeks before those floods, which stated that the cost of riverine flooding might reach as high as £2 billion in the worst case. In fact the floods actually cost about £600 million, so the event was not by any means the worst possible scenario. One very interesting feature was that many of the houses that were flooded were not near recognised watercourses. They were flooded by water backing up along the drainage system! Many modern areas are serviced by Victorian sewers, built for an age when domestic water usage was much less, and of course when rainfall seemed to be less erratic. Therefore a simplistic approach to the risk of flooding, by simply examining historical floodplain maps will not provide a reliable answer.

Coastal areas

 

"I can hear the sea quite clearly now" Cartoon: Ken Alexander.

Even more damaging than rainfall is the threat of coastal inundation. This is particularly true in the southeast of Britain where the land is still slowly falling after the disappearance of the Ice Age glaciers 10,000 years ago, which squashed the land with their colossal weight. This risk was recognised for London, and resulted in the construction of the Thames Barrier. However, there are many sensitive areas which it does not protect, e.g. Canvey Island, and as the sea rises due to global warming this will become a more urgent issue. The key here is to ensure that coastal defences are in good order: on the two occasions when there have been major inundations (1953 and 1990), the poor condition of the seawall was a significant factor.

Although the UK has the widest insurance cover in the world, it still does not cover everything. Two examples of exclusions, which can be expected to become more common with climate change, are coastal erosion, where the land is permanently lost to the sea; and vermin/insect infestation. The east and south coast of England is particularly vulnerable to the sea, and a study of old maps will reveal where the sea has been advancing. As pressure grows to improve the general quality of sea defences, it is inevitable that some areas will have to be abandoned. The other issue is that as winters become warmer, exotic pests will become persistent. Already termites are establishing themselves in the southwest of England, with obvious implications for wooden structures. This is already a major problem in New Orleans and in some districts of Paris.

Insurer Action

Faced with these problems, insurers are beginning to take a number of actions. Already the cosy world of uniform pricing was crumbling under the pressure of market competition, but now one of the key determinants in the premium for a particular property could well be its exposure to natural hazards. Underwriters will therefore have to devote more attention to detailed geographical databases, possibly even to the level of individual trees, and also to obtaining more relevant projections of future weather conditions, and this has already produced a number of specialist consultancies offering services in these areas. Collectively the insurance industry has also begun to mobilise in the UK, in particular to cajole the government into a more pro-active stance on the development of floodplains for housing.

A remaining concern now, must be whether the industry can still cope with a major incident on the scale of the 1987 and 1990 storms. The lessons learned from the October 1987 disaster helped insurers and loss adjusters to improve their contingency planning , so that when the next series of storms arrived in January 1990, their offices were much better able to cope. Since then however there has been a huge contraction in the industry due to merger activity. This has resulted in many fewer offices and a loss of knowledgeable staff (pensioned off to reduce the salary bill).

Asset Management

Meanwhile the investment (or asset management) side of the insurance industry has begun to realise that climate change is potentially destabilising to conventional patterns of economic activity. The world is already on an unsustainable path of resource consumption, but the underlying trends in water shortages, property losses, and regional instability will be exacerbated. To put a halt to this will require a huge shift in our customary patterns of energy consumption: we need to reduce emissions of greenhouse gases by something like 60% in the coming decades, instead of which they have been growing at a rate of about 20% per decade. This means that investing in projects like new Alaskan oilfields, or coal-fired power stations in China are not likely to provide an equally valuable return over their normal lifespan. Increasingly, perceptive financial companies are beginning to question the rationale that drives many of the investments they have traditionally backed without a second thought. Of course, as the problems over the Kyoto Protocol show, it is no easy matter to get countries to agree on controlling greenhouse gases, but there is now so much concern over the possibly irreversible impacts of Climate Change, that momentum does seem to be building. In fact, the business world is losing patience with the lack of political progress, for until the new rules governing the cost of carbon emissions are clear, it is impossible to make rational investment decisions.

Contraction and Convergence

On the international scene, a number of large insurers and banks have joined together under the aegis of the United Nations Environment Programme (UNEP Financial Institutions Initiative), to set out a plan for action. A key feature is the adoption of a system called Contraction and Convergence, which was formulated by a small British NGO and proposes a global contraction of emissions to be achieved by a convergence over several decades towards a flat per capita emission level for every inhabitant of the planet. This would give the sort of framework within which business could use its entrepreneurial skills to improve energy efficiency, develop alternative energy and develop markets to trade in emissions permits.

The UK government has given pensioners and those in work the means to find out how their own pension fund is tackling these issues, by introducing a regulation in July 2000 which means that effectively the trustees of the fund must declare what position they are adopting on social and ethical issues. It used to be the case that trustees would base their strategy on short-term performance tables and risk-profile, but it is now recognised that the beneficiaries real interest lies in having a secure environment to enjoy their fund when they retire, which is not necessarily the same thing.

Where Next?

On ClimateX.org

Find out more about flooding in our introductory article ‘Flooding: an Introduction' by Asher Minns.

External links

To find out more about tornado damage in the UK try the Tornado and Storm Research Organization.