News that the Financial Reporting Council (FRC) is proposing new rules for insurance companies to ensure actuaries factor in climate change risk was the latest in a string of climate-orientated regulatory warnings issued to the UK insurance sector. The move followed the results of a Blackrock survey in which 95% of insurance executives said climate risk will have a major impact on how they build their portfolios over the next two years.
On a positive note, however, Jill Boulton (pictured), flood consultant at Addresscloud, noted that amid these increased calls for insurers to up their game around climate, attitudes to climate risks are changing across the sector. Overall, she said, there is a positive sentiment that is slowly translating into actions by insurers to risk assess their books against climate change.
“Insurers are starting to take note, driven by the climate change events we are seeing around the world and by awareness programmes such as Flood Re’s recent Build Back Better initiative,” she said. “Regulatory requirements are often a big driver for these changes as well, rather than an internal need.
“However, as most policies renew on an annual basis, we believe that many providers are simply not looking ahead at the longer term implications for their whole book. Although there’s no doubt that climate change is happening now, and the recent heatwave is yet another uncomfortable reminder of this, climate science is really still in its infancy so the extent of the problem and the impact on the industry is still nebulous.”
Boulton highlighted the “massive rise” in the frequency and severity of natural disasters worldwide. What used to happen occasionally is now a regular occurrence, she said, for instance, the sudden and unpredicted flash-flooding in London and widespread flooding across Europe last summer.
The claims costs associated with weather events have also risen quickly for several reasons, she added, including an increase in the popularity of building-down, with more basements kitted out with expensive leisure set-ups. In addition, the public generally has more possessions now, and in the UK, labour and material costs have risen sharply.
“Most concerning is that we are also building on more marginal land, increasing the number of new properties at risk,” she said. “It’s also worth noting that the ban on price-walking also factors in here. Insurers may now be retaining customers for longer than just one annual cycle so they must start to take a longer-term view of the risk on their book.
“These factors have caused a perfect storm that should cause insurers to sit-up and take notice, as the financial impact of climate change on their bottom line becomes more tangible.”
Insurance businesses not modelling for climate change gives rise to a number of pressing implications, Boulton said. Underpinning these is the reality that not taking steps to model for climate change means that insurers can’t possibly understand the extent of the potential losses that could arise in the coming years as the number of incidents and the associated costs increase.
The consolidation of the market into larger players over the past five-10 years is also a positive and negative here, she said, as a failure of any of these entities would be unthinkable.
In Addresscloud’s experience, the use of coastal erosion products by insurers lags well behind those relating to flood, but as climate change leads to a rise in sea levels, more properties will be at risk of exposure to this phenomenon. Boulton cited a recent paper from the Tyndall Centre in the University of East Anglia, which estimated that nearly 200,000 coastal properties could be at risk by the year 2030. Insurers need to look forward at the number of properties that are likely to be impacted by this, she said, otherwise the sector will see vast numbers of policyholders unable to obtain cover.
Several challenges are lying in the way of insurers fully embracing the need for climate preparedness, and these are positioned against the backdrop of the insurance industry being historically slow to change. This is particularly the case with more established industry giants, she said, who have huge books of historic data, including address information, that may no longer be reflective of the current day exposure.
“That slow pace of change is further hampered by the unpredictability of climate change – we all know it’s happening, but predicting outcomes with any accuracy remains difficult - the science is improving but not wholly reliable yet,” Boulton stated.
Recent initiatives, such as Flood Re’s ‘Build Back Better’ aim to mitigate future insurance claims by building better flood resilience, she said, but this concept flies in the face of the whole premise of insurance – restoring policyholders to the same position they were in before the incident. As a result, insurers may well struggle to implement these measures in line with the traditional insurance model.
Since its launch, Addresscloud has formed a series of long-lasting and significant partnerships with key industry players and Boulton highlighted how these came about to address these challenges. The firm’s recent partnership with FloodRe is an excellent example of its model in action, she said, as any insurer using FloodRe’s Property Data Hub will get rooftop-level property data information to help them make rapid and accurate ceding decisions at risk level.
This kind of information, at the quote stage, will enable underwriters greater insight into the changing nature of flood risk in real-time, she explained. Meanwhile, this accurate address-matching service is enriched with the support of expert data providers such as JBA Risk Management, Ambiental and Dye & Durham (Terrafirma).
Each of these businesses has market-leading insights on perils such as flood, subsidence and climate change, she said, and these, combined with Addresscloud’s own address data, give clients an accurate picture of the exposure on their books, and help them respond quickly to these challenges. With the success to date of these partnerships in mind, Boulton emphasised that she is very positive the insurance industry will more widely embrace the role it has to play in facilitating greater climate preparedness.
“In the end, the insurance industry has always risen to a challenge,” she said, “supporting its policyholders with new and innovative solutions for a changing world.”
