World leaders meeting at the Group of Eight summit in Gleneagles on Friday promised to take urgent steps to meet the challenge of climate change but failed to set targets or a timetable for action.
Environmental groups criticised the politicians’ lack of urgency at a time when many experts believe the impact of climate change is being felt with increasing ferocity around the world. In recent years Europe has experienced three extreme weather events – each costing the insurance industry between €10bn-€15bn.
In 1999 storms swept northern Europe; three years later central Europe experienced severe flooding; while in 2003 the continent sweltered under a heatwave leading to a sharp rise in deaths among the elderly.
Spain, meanwhile, is in the grip of drought and scientists warn that parts of the country run the risk of turning into desert, threatening agriculture and tourism. Closer to home, the UK has suffered three devastating incidents of local flooding in the past 12 months, at Boscastle in Cornwall, Carlisle and Helmsley, North Yorkshire.
“Climate change is not something that is going to happen in the future,” says Andrew Torrance, chief executive of Allianz Cornhill Insurance. “It is happening now and we are seeing higher levels of losses around the world.”
As first in line to meet much of the costs of these disasters, the insurers have been looking closely at climate trends and their likely impact.
A wide-ranging report entitled Financial Risks of Climate Change published by the Association of British Insurers in advance of the G8 meeting forecast that the worldwide cost of large storms could increase by up to two-thirds to £15bn in an “average” year by the end of the century.
In a worst case scenario, prompted by a doubling of carbon dioxide levels, the cost of the insured damage caused by a severe hurricane season in the US could rise by three-quarters to £82bn in 2080. This is an increase equal to the impact of almost three Hurricane Andrews, which struck Florida in 1992 and which is the costliest single weather event recorded. The cost of Japanese typhoons could increase by around two-thirds to reach £19bn a year.
In the UK alone, the annual cost of flooding would rise almost 15-fold to £22bn by 2080 if carbon emissions continue at a high level. These projections underestimate the likely cost of future storm losses because the impact of very heavy rainfall – the reason for recent UK floods and storm surges was not included in the calculations.
In addition, population growth is leading to the expansion of towns in vulnerable coastline areas and to increased concentrations of population in large cities. The cost of Hurricane Andrew would have been double if it had hit the same area 10 years later, the ABI study shows.
But many of these costs could be avoided if action is taken now, the ABI says. Reducing carbon emissions would reduce the likelihood of severe storms while tough, well-enforced building codes could prevent and reduce windstorm damage. Upgrading building design standards in the south-east of England would reduce windstorm damage significantly while effective flood management could save 80 per cent of the costs of flood damage.
Much of this depends on governments taking action to improve flood defences. The UK has increased its spending on flood and coastal defences by £90m to £570m in 2005-2006. Some of the biggest projects to receive funding are London’s tidal defences, sea defences in the south-east and the rivers in the north.
But the insurance companies too are taking steps to increase the reliability of their risk assessments. Several have devised maps that identify the areas most likely to flood and areas liable to subsidence. The prospect of prolonged periods of drought increases the risks that heavy soils will contract, undermining the foundations of many homes.
More Than, part of the Royal & Sun Alliance group, has been using geographical risk analysis for both flooding and subsidence since 2002, while Norwich Union last year created a digital flood map covering England and Wales. The Environment Agency maintains a flood map of the country accessible from its website.
A limitation of some mapping systems is that they work on postcode data, which fails to distinguish a house at the top of the hill from one at the bottom. The mapping systems used by More Than and Norwich Union both distinguish between individual properties in a postcode area.
“We are analysing the flood map to see if we can extend it from just river flooding to cover coastal and flash flooding, subsidence and wind damage,” says Norwich Union.
The challenge for the insurers, and the reason why they are spending large sums on sophisticated mapping techniques, is to be able to keep offering insurance cover at realistic rates. Simply withdrawing from certain sectors is not an option if the industry wants to continue growing.
“It is really about understanding your risk,” says David Pitt, head of insurance at More Than. “There may be other insurers declining to provide cover but we aim to understand the risk and then provide the cover.”
What does this mean for the householder, in terms of premiums and the availability of cover? On this the industry is less precise than on its costing forecasts.
The ABI expects that high levels of carbon emissions will lead to an 80 per cent increase in the “risk premium” – that is, the cost of annual losses and the cost of raising the capital needed to fund the risks – in the US hurricane and Japanese typhoon markets by 2080. In the European windstorm insurance market, the risk premium is expected to rise by a more modest 15 per cent.
However, the ABI says, “actual premiums are unlikely to change by the amounts suggested by this simplified analysis”. Supply and demand in the traditionally highly cyclical insurance market will mean “that actual premium rates often diverge significantly from the purely technical premium”.
Despite increasing weather-related losses, competition has kept UK average household premiums increases to just 3-4 per cent a year in recent times, according to the ABI.
What happens in 2080 is anyway of little interest to policyholders who are more focused on the level of premiums over the next few years. Insurers appear agreed that premiums will have to go up for the 5m people who live or work in areas at risk while 1.8m properties are also at high risk. Norwich Union said as much in the aftermath of the Carlisle floods. The company also estimated that premiums for households at risk had already been rising by 10 per cent a year over the previous year or two.
“If these natural catastrophes trend up then it is inevitable that premiums will rise to reflect that,” says Allianz Cornhill’s Andrew Torrance.