Climate change and extreme weather

Emma Falloon, member of the Forum of Insurance Lawyer’s property team and associate at Kennedys.

The escalating frequency and severity of weather related events has created significant challenges for the insurance industry. Insurers have been using tools to predict weather related disasters for decades but there are concerns as to whether this modelling which relies on historical data can keep pace with the effects of climate change on our weather. 

Globally, the number of extreme climate related disasters including floods, storms and heatwaves has doubled since the early 1900s. In May 2022, it was estimated that there has been an increase of 250% in insured losses caused by extreme weather events in the last 30 years. The Allianz Risk Barometer 2023 showed that natural catastrophes and climate change remain major concerns for business and rank in the top 7 global business risks. To put this into perspective, Aon’s report of January 2023 states that the cost of global insured catastrophic losses exceeded $130 billion in 2022, the fifth costliest year on record. Hurricane Ian, the second costliest natural catastrophe event on record, significantly contributed to this figure. Aon further reported that the total overall economic losses for extreme weather events stood atS$313 billion.  

The UK also experienced its share of severe weather in 2022 including soaring temperatures reaching 40ºC and we have since seen an increase in flooding, storm damage, wildfires and subsidence claims.  

Product innovation

The insurance industry has a unique role to play in addressing climate change by making society and the economy more climate resilient. Rather than driving up premiums – or simply declining cover – for housing in particularly disaster-prone areas, insurers have begun to consider innovative insurance products that incentivise reductions in climate-related risk.  A leading example of this is Flood Re’s proactive initiative, the Build Back Better programme, which launched in 2022. To date, 65% of residential property insurers have signed up to the scheme and Prestige Underwriting became the first MGA to sign up in May 2023.

Build Back Better offers homeowners the chance to install resilience measures such as raised electrical sockets, non-return valves and self-closing air bricks along with flood resistant doors up to the value of £10,000 when repairing their properties after a flood.  These measures can reduce the policyholder’s risk exposures and uninsured losses going forward. The scheme also covers the cost of surveys to understand the flood risk and potential mitigation of individual properties in case of future flooding. This should all mean that, if a future flooding event does occur and water breaches a home, it will be quicker and less costly to remediate any damage. 

Recent statistics also show that 1 in 6 homes are at risk of flooding in England. Climate change will likely see this number increase, and this is one of the reasons why Flood Re has argued that this scheme ought to be offered by all residential property insurers. It is unclear whether a similar scheme will be introduced for commercial buildings which would include apartments and mixed use developments/properties. 

Adaption measures

We anticipate that ground-breaking schemes such as this will become more common as it is evident that insurers must consider the long-term risks of climate change and ways to mitigate these risks in the future. Short-term answers can no longer be the solution. Clearly, adaption measures such as those offered by the Build Back Better scheme can be a key tool to maintain the future supply of insurance products with coverage against climate hazards. 

Insurers should work with their policyholders to alleviate climate risk exposure and improve their assessment of climate risk; this is key when dealing with subsidence claims as often there are delays before property owners discover cracking and damage caused.  Consequently, in the short term, insurers may not see an immediate rush of claims arising from extreme weather conditions. However, these issues cannot be ignored. As the weather gets increasingly warmer and drier, it is possible that subsidence ‘surges’ will become less common. Instead, they may be replaced by consistent subsidence in the summer months.  Without intervention, this problem will worsen.  

Insurers can look to shift business models towards scaling existing incentives, such as rebates for using resilient ‘greener’ construction methods and materials that are better placed to withstand climate change. However, such a move does bring its own challenges, requiring recalibration of an Insurer’s risk matrix to reflect the new construction methods, rather than simply relying on previous understandings of the risks associated with traditional building methods and materials. Investment by Insurers in developing new risk matrixes for ‘greener’ technologies at this early junction is therefore vital. 

Collaborative approach

It is clear however that the insurance industry cannot tackle this crisis alone. Insurers have been calling on government, local authorities, developers, industry bodies and businesses to address the threats climate change poses to the UK. As the government develops its strategy to accelerate housing delivery and reform planning systems, insurers have flagged that the opportunity to build safer and more sustainable homes should not be missed.  Construction professionals will also need to consider how structures can be designed to better withstand climate changes. In addition, there have been calls to strengthen planning and building regulation to prevent new properties from being built on floodplains and ensuring that existing properties have resilience and safety measures in place.

By taking a proactive approach to risk management, Insurers can not only protect policyholders from future losses but also ensure the long-term availability of insurance products and reduce the overall cost of insurance.