Examination of Witnesses (Questions 105
- 119)
WEDNESDAY 5 MAY 2004
MS JANE
MILNE, MR
PETER DOWER
AND MR
SEBASTIAN CATOVSKY
Q105 Chairman: Please accept our
apologies for keeping you waiting for a few moments and thank
you very much for coming to see us this afternoon to give evidence
on our water security and flooding inquiry. We have got Jane Milne,
who is the Head of Household and Property. That sounds very good,
so if we have problems with our policy we come to you, do we?
Ms Milne: Absolutely.
Chairman: See you afterwards. Then we
have Mr Peter Dower, the Underwriting Manager for Zurich Insurance
Group and the Chair of the ABI Thames Gateway Working Group. You
are a very busy man, Mr Dower. Lastly, we have Sebastian Catovsky,
Policy Adviser for Natural Perils. We should have a very interesting
time with our questioning.
Q106 Mr Mitchell: You refer to the
increase in economic losses in the memorandum which you gave us
and I just wonder whether all of that is due to climate change.[20]
What has been the effect of climate change on your industry?
Ms Milne: In looking at the rise
that has happened over the last four decades it is fair to say
that a good proportion of that has been about the way we use land
and the sorts of assets that we have at risk rather than climate
change per se, although there have been an increasing number
of events as well so that has contributed to the overall effect,
but unpicking how much is due to the fact that there are just
more properties in at-risk areas is quite difficult.
Q107 Mr Mitchell: Can you put a proportion
on what is due to climate change?
Ms Milne: I do not know what the
answer to that is but there are also some figures over the increasing
numbers.
Mr Catovsky: The figures that
the reinsurers have provided, looking at worldwide losses at least,
not in the UK, they suggest that three-quarters of the economic
losses are due to weather events. Of course, how much of that
is directly related to a change in climate is quite difficult
to measure.
Q108 Mr Mitchell: Can you measure
the incidence of weather events in, say, the last five years as
opposed to the fifties or something?
Mr Catovsky: Certainly in the
UK we have found that over the last five years storm and flood
losses have been five billion pounds, which is more than double
what they were in the previous five years, but on those sorts
of timescales it is very difficult to say that this is due to
climate change. Certainly you can say that these are consistent
with what we would expect climate change to be producing and they
are consistent with what we might expect to see in the future
as well.
Q109 Mr Mitchell: So what kinds of
estimates are you making about the future and what steps have
you taken to provide for climate change in the future?
Ms Milne: The Foresight Report,[21]
which came out last week, has put some pretty scary numbers around
some of these things where current flood damage is estimated at
around one billion pounds per annum and, depending on which scenario
you follow, it could be anywhere between two billion pounds and
£20 billion per annum by the end of the century, so it could
be double what it is now or it could be a factor of 20 more than
what it is now.
Q110 Mr Mitchell: You do not see
this as a way of hyping up fear and alarm and therefore concern
to get something done about the issue because really there is
no very accurate way of predicting, is there?
Ms Milne: It is very true to say
that there is a lot of uncertainty around climate change predictions,
particularly when you go out the full length of the century. If
you look over the next 30 to 40 years in fact we are already locked
into most of the changes through the emissions that have already
happened, so it does not matter whether you believe one scenario
is more likely than another.
Q111 Mr Mitchell: So that could only
get worse, the changes that have happened? There is more change
to come?
Ms Milne: That is right, but it
is one of those classic areas where there is now quite widespread
acceptance that this is happening and that there will be certain
types of change. Exactly by how much and when is the point that
is under debate but that is a circumstance where the precautionary
principle has to apply and one needs to start putting in place
policies now that at least give you the flexibility to respond
appropriately in the future.
Mr Dower: Also, I would not want
to say that we want to create fear and alarm; we want to create
recognition. Once you have got recognition you can start doing
something about managing the risk. As the industry we do believe
the risk is manageable but it is no good leaving it till 20 years
on.
Q112 Mr Mitchell: Do preparations
and prospects here differ from those of other countries?
Ms Milne: There will certainly
be impacts that are felt in other countries and in as far as insurance
is a global industry we will be affected by those impacts elsewhere.
Q113 Mr Mitchell: More or less than
other countries?
Ms Milne: It depends on lots of
things like topography and all sorts of other issues. That is
an issue that the reinsurance industry has taken a big interest
in but as an association our focus necessarily has been on the
UK.
Q114 Mr Mitchell: Yes, but we do
know whether we have got more houses exposed to flooding or industrial
areas exposed to rising tide levels or whatever. We know those
figures so what do they tell you?
Mr Catovsky: Certainly compared
to other parts of the world, particularly developing countries
where their economic growth is smaller and they are less able
to deal with the changes, and predictions do suggest that there
will be some very significant impacts in other parts of the world
as well, what we see in the UK is that we can perhaps better afford
to deal with some of the impacts but we need to start putting
things in place to make sure that we are prepared, and of course
we have greater assets at risk because we have more assets available.
Q115 Mr Mitchell: There is also a
suspicion with an interest group that you are hyping up the fear
in order to hype up the premiums. What estimates have you made
about the increase in premiums? Let us take it by household and
by industries.
Ms Milne: What we are trying to
do is to get the risk managed so that there is not an impact on
insurance or we can minimise the risk on insurance. The UK is
quite unique in having the level of cover, both flood and storm
cover, available on a voluntary basis from the insurance industry.
If you lived in France or Germany or wherever you would not have
the same amount of insurance cover available.
Q116 Mr Mitchell: Why is that?
Ms Milne: Because in some markets
insurers have decided that it is essentially uninsurable because
of the nature of the weather events that they have.
Q117 Mr Mitchell: I can see that
in Bangladesh but not necessarily in France.
Ms Milne: The French insurers
would argue that quite strongly with you and they have gone into
partnership with Government where in effect Government provides
the reinsurance for natural catastrophe cover over there. We have
taken a very different route in partnership with Government over
the last 40 or 50 years which said that Government would do its
bit in managing the physical risks and we would provide the financial
protection. We would like to continue that because that is what
we think our customers want from us and by taking the right steps
now that means that we will stay as near as we possibly can to
the current situation because if we move to the point where premiums
become unaffordable that is going to have huge social and economic
consequences as well as, frankly, losing us customers that we
would like to retain.
Q118 Mr Mitchell: So what estimates
have you made about the increase?
Ms Milne: Flood claims typically
cost in the region of £15,000 to £30,000 per claim.
A typical household premium, according to the ONS figures, is
£295 per annum. You cannot fund many £30,000 claims
out of that so you would need to see quite a rapid increase in
those premiums if you got very frequent flooding. We have suggested
that the once-in-75-years type of frequency is about the limit
of what people would normally expect to pay on their insurance
premiums. We can offer cover beyond that but that is when the
premiums really start to get into the sort of territory that people
are not expecting to pay on a household premium.
Q119 Mr Mitchell: That is houses.
What about industry?
Ms Milne: It would work the same
way although we take a different approach with a lot of commercial
policies so that if it became a particular problem on a particular
site we would work with the commercial customer either to put
in place their own arrangements or we would move to exclude cover.
Mr Dower: Generally speaking industrial
premises tend to be more resilient to flood and you have more
options to manage flood events than you would have for a private
house. Typically with a factory you can make sure you do not store
stock and have machinery on the first floor if there is a flood
threat. There is rather more you can do because you can look upon
each risk and there tends to be more money to do things as well.
On your premium question, speaking just as an insurer, it is an
impossible question to answer because you get to the ultimate
and ridiculous scenario where, if a premise is going to be flooded
every year, the premium in theory that you require is going to
be the full cost of the reinstatement of that event plus your
on-costs. You have a whole spectrum between what is paid now,
what might be paid in the future and what becomes "uninsurable"
because all things ultimately are insurable at a price.
20 Ev 31 Back
21
Future Flooding, Foresight, Department of Trade and Industry,
April 2004. Back
| 
