The subsidence surge

Continued extreme heat could see subsidence insurance pay-outs increase to nearly £2 billion by 2030.

We have been consistently warned in recent years that climate change is making subsidence a serious issue for the market. And the recent stats from the UK would seem to confirm this gloomy prognosis The cost of a subsidence surge last year is expected to reach £219m, according to the Association of British Insurers. Some 23,000 claims were made in 2022, compared with the 16,000 that would be made in an average year, when total costs are around £60m.

In France, there has been a steady increase in soil subsidence-driven property damage losses. Loss estimates for 2022 range from EUR 1.9 to EUR 2.8 billion, according to France Assureurs. This compares to losses of EUR 2.1 billion for the previous record-breaking year, 2003.

Increased costs

Now, according to PWC, sustained heat, floods and heavy rainfall could also see insurers hit with further increased costs, with subsidence related insurance costs swelling to over £1.9 billion by 2030 according to new analysis by PWC.

The analysis shows that subsidence related insurance will see significant  impact if levels of sustained heat continue. The findings reflect the impact record temperatures can have on insurance claims, with a global increase in unusually hot summers.

In addition, according to PWC, the extreme winter weather from 2019 to 2020 saw economic losses of £333 million due to flooding and this figure could soar to £500m in 2050 assuming that flood-management approaches and expenditure remain unchanged.

PwC modelled the insurance impact on increased weather related losses under the high end of the range of future pathways (Shared SocioeconomicPathways 5-8.5).

The findings from the model showed that:

  • The economic losses from the winter 2019 to 2020 flooding, which were about £333 million, could increase to close to £500m under this climate change scenario, assuming flood-management approach and expenditure remain unchanged and before allowing for inflation
  • The expected cost of subsidence for insurers could increase to £1.9bn by 2030
  • The economic cost of flooding in the UK could increase up to 18% for fluvial flooding and 43% for coastal flooding, on average by 2050

Mohammad Khan, general insurance leader at PWC UK, said: “Our model attempted to put a numerical figure on the impact extreme weather will have on insurance claims. With repeated very hot summers, we are seeing a rise in subsidence cases. Given the already dry soil and further hosepipe bans, we could see a significant spike in subsidence, which causes the ground beneath a building to sink and potentially pulling the foundations down with it.”

“We are also seeing other property damage claims related to fires starting in nearby open areas that then spread to homeowners’ gardens and result in fence, garage and decking fires.

“Extreme weather events like this can result in some insurers taking drastic action, such as exploring the risk/cost benefit of giving cover in certain circumstances. This can result in cover for some risks becoming unaffordable or simply unavailable for home-owners in the worst affected areas.”

Scenario modelling

“It’s clear that ongoing impact on climate change will significantly shape how the sector will choose to manage and absorb risks, and our new modelling proves that potential costs could be the deciding factor as to whether a household receives vital cover or not. Scenario modelling is an important step towards understanding climate change losses and managing its impacts on the future cost and availability of insurance and should be seen as more than a reporting exercise”

According to PWC, results from Climate Biennial Exploratory Scenario (CBES) published in 2022 by the Bank of England sought to explore the financial risks posed by climate change for the largest UK banks and insurers. The scenarios used in the original exercise attempted to illustrate the financial risks from the physical effects of climate change and the potential to affect the vulnerability of banks and insurers to shocks.

They found that:

  • 7% of UK households covered by participating insurers could be forced to go without insurance, and for the top 5% of most affected postcodes the increase in average annual losses could be 548%.
  • If no action for climate change is taken, CBES findings indicate there could be significant impacts on the cost, including a possible doubling of premiums, and on the availability of insurance.
  • In Australia, severe flooding including repeat instances has raised the question of ‘managed retreat’ from flood prone areas.
  • In the UK, PWC added, forestry organisations are already finding insurers are pulling out of forestry and forested areas completely without considering the risk mitigation adopted by managed forests. This can make insurance cover hard to find or at an extremely high premium rate, which can make it unaffordable.

The economic losses from the winter 2019 to 2020 flooding, which were about £333 million, could increase to close to £500m under this climate change scenario, assuming flood-management approach and expenditure remain unchanged and before allowing for inflation