Memorandum submitted by the Association
of British Insurers (ABI) (U25)
Climate change will have a direct impact on
the property insurance market, because it will increase the frequency
and severity of extreme events, such as floods, windstorms, and
very dry summers (higher subsidence claims)—exactly those
occasional, unexpected events for which insurance provides financial
protection. Over the past six years, storm and flood losses in
the UK have exceeded £6 billion—twice the previous
period. Initial calculations suggest that future claims costs
could be two or three times higher than today's levels unless
we begin to action to prepare for climate change.
Adaptation to climate change needs to take place
in parallel with efforts to mitigate the causes (greenhouse gas
emissions). We are already locked into a significant degree of
climate change, no matter what we do to reduce emissions of greenhouse
gases. The long lifetime and high cost of buildings and infrastructure
means that we need to start thinking right now about preparing
for the impacts of climate change.
Government policies should take explicit account
of climate change to reduce future costs and damages to society,
including building an allowance for climate change into:
— Building regulations and voluntary
building codes.
— Planning and development control.
— Design of coastal flood defences.
— Design of sewer drainage systems.
Ultimately, climate change can only be solved
through concerted and coordinated global action to reduce emissions
of greenhouse gases, so that carbon dioxide levels in the atmosphere
are stabilized in the long term. The UK insurance industry could
be influential internationally to promote global action on climate
change, and would be pleased to work with the Government using
existing international links to encourage global action on climate
change.
1. The Association of British Insurers (ABI)
is the trade association for insurance companies operating in
the UK. It represents over 400 members who, between them, transact
around 95% of UK insurance business. It is estimated that the
insurance industry accounts for 20% of investment in the stock
market.
CLIMATE CHANGE
AND INSURANCE
2. The insurance industry has been concerned
about the impacts of climate change for a number of years.[55]
Insurers recognise that unless we take action to tackle climate
change, we could face rising costs of weather damage in the future.
3. Climate change will have a direct impact
on the property insurance market, because it will increase the
frequency and severity of extreme events, such as floods, windstorms,
and very dry summers (higher subsidence claims)[56]—exactly
those occasional, unexpected events for which insurance provides
financial protection. By increasing the risk and cost of weather
damage, climate change could threaten the ability of insurance
products to act as an effective mechanism for risk transfer.
4. On a global scale, we have already seen
that economic losses due to natural weather catastrophes have
increased ten-fold in the last 40 years (Figure 1). Losses caused
by natural disasters worldwide in the last 15 years have totalled
$1,000 billion, about three-quarters of which are directly linked
to climate and weather events.
5. According to a recent study by the ABI,[57]
risks from weather damage are already increasing by 2-4% per year
on insurers' property accounts due to changing climatic conditions.
Over the past six years, storm and flood losses in the UK have
exceeded £6 billion—twice the previous period.
6. The underlying risk from extreme weather
will continue to increase in the future, and more than likely
at an accelerated pace. Initial calculations suggest that future
claims costs could be two or three times higher than today's levels
unless we begin to action to prepare for climate change (Table
1).
THE NEED
FOR ADAPTATION
7. Adaptation to climate change needs to
take place in parallel with efforts to mitigate the causes (greenhouse
gas emissions). We are already locked into a significant degree
of climate change, no matter what we do to reduce emissions of
greenhouse gases. National and international efforts to reduce
greenhouse gas emissions may lessen the degree of climate change
in the coming century, but they will not prevent it completely.
Table 1
PRELIMINARY ESTIMATES OF FUTURE COSTS OF
WEATHER INSURANCE CLAIMS (£ MILLION IN 2004 PRICES).
|
| Today Annual average
Extreme year
| 2050 Annual average
Extreme year
|
|
| Subsidence | 30
| 600 | 600
| 1,200 |
| Storm | 400
| 2,500 | 800
| 7,500 |
| Coastal flood | —
| 5,000 | —
| 40,000
(London affected) |
|
Source: A Changing Climate for Insurance, ABI, June
2004.
8. According to model runs by the Hadley Centre, even
if we are able to prevent any further increase in carbon dioxide
concentrations in the atmosphere, something which would itself
involve a 70% cut in emissions with immediate effect, the inertia
built into the climate system means that we are already committed
to an eventual 1.5ºC rise in global temperature and a 1-m
rise in sea-level.
9. This message was brought home recently by the Government's
Foresight report,[58]
which showed that building climate change into flood risk management
policies and plans today could reduce the costs of annual flood
damage from £21 billion to £2 billion, while a low-emissions
scenario only reduced costs of flooding by 25% compared to a high-emissions
scenario.
10. The long lifetime and high cost of buildings and
infrastructure means that we need to start thinking right now
about preparing for the impacts of climate change. Many impacts
of climate change can be minimised by comparatively small expenditure
during planning, construction, and renovation, so it is important
to build adequate protection into plans at an early stage.
11. A recent ABI study[59]
examined the costs of installing flood-resilient measures into
a property after a flood or during the normal course of renovation,
and compared these with the damages saved after the next flood.
Many measures paid for themselves after a single flood, for example:
— Replacing untreated wood floors with tiled concrete.
— Replacing chipboard kitchen and bathroom units
with plastic or ceramic.
— Replacing gypsum plaster on walls with lime-based
or waterproof render.
— Moving service meters, boiler, and electrics well
above likely flood level.
— Installing one-way valves in pipes to prevent
sewage back-up into property.
GOVERNMENT POLICY
AND ADAPTATION
12. In the Climate Change Programme,[60]
the UK has already set priority policy areas for adaptation, focusing
on sectors that are vulnerable to changing weather patterns and
where long planning horizons mean that decisions taken today will
leave a legacy in the country's future climate, eg spatial planning
and building design.
13. Now that we have relatively advanced predictions
about the changes in climate this century, it is important that
these policy areas take explicit account of climate change.
— Changing building regulations and voluntary building
codes (eg new Code for Sustainable Building), so that they use
future climate instead of historic weather patterns to set standards.
Buildings constructed today will typically still be in place when
the most serious impacts of climate change begin to be felt, but
they will not have been designed to be resilient to these impacts,
unless these effects are incorporated into the building regulations
and building design codes.
— Developing a stronger and more transparent planning
system, so that development in the floodplain is curtailed. Since
land use planning plays such a key role in the sustainable management
of flood risk in the long term, particularly with the added pressure
of climate change, ABI would like to see current Government guidance
(PPG25) strengthened. The sequential planning test set out in
PPG25 should include explicit allowance for climate change, and
the Environment Agency should be made a statutory consultee on
all planning applications in flood areas.
— Flexibility should be built into the design of
coastal defences to take account of potential increases in storm
surge heights due to climate change (Figure 2). Climate change
could add more than 1 metre to present-day storm surge heights
along parts of the coast,[61]
although there is considerable disparity between different models
about where these effects will be manifested. Nevertheless, ABI
would like to see greater allowance for the impacts of climate
change on storm surges included in coastal defences works—particularly
for East Coast locations where the potential consequences of a
significant storm surge are very serious.
— New sewers should ideally be designed with sufficient
capacity to cope with the increased heavy rainfall we will experience
as a result of climate change. In the current pricing review,
Ofwat should enable water companies to include an allowance for
climate change in the costs of any new capital scheme. Climate
change will not just increase the quantity of rainfall but also
its intensity, perhaps by up to 20%[62].
INTERNATIONAL CLIMATE
CHANGE POLICY
14. Climate change is a key policy issue for the current
Government. Tony Blair has pledged his personal commitment to
tackling climate change during his time as Prime Minister, and
has set climate change as one of two top priorities for the Government
as Chair of the G8 and as President of the European Council in
2005.
15. Ultimately, climate change can only be solved through
concerted and coordinated global action to reduce emissions of
greenhouse gases, so that carbon dioxide levels in the atmosphere
are stabilized in the long term.
16. Insurance is now a global industry, and a powerful
financial force in many developed and developing countries. The
UK insurance industry could be influential internationally to
promote global action on climate change, and would be pleased
to work with the Government using existing international links
to encourage global action on climate change.
1 October 2004
55
Climate change and the financial services sector: an appreciation
of the UNEPFI study, A Dlugolecki and T Loster (2003), Geneva
Papers on Risk and Insurance 28, 382-393. Back
56
Press Release WMO No. 695, World Meteorological Organisation,
2003, http://www.wmo.ch/web/Press/Press695.doc Back
57
A changing climate for insurance, Association of British Insurers,
June 2004, http://www.abi.org.uk/climatechange Back
58
Future Flooding, Office of Science and Technology Foresight Programme,
April 2004, http://www.foresight.gov.uk/fcd.html Back
59
Flood Resilient Homes, Association of British Insurers, April
2004, http://www.abi.org.uk/Display/File/Child/228/Flood_Resilient_Homes.pdf Back
60
The UK Climate Change Programme, Department of Environment, Transport
and the Regions, November 2000, http://www.defra.gov.uk/environment/climatechange/cm4913 Back
61
Climate change scenarios for the United Kingdom, UK Climate Impacts
Programme (2002) [http://www.ukcip.org.uk/scenarios] Back
62
Climate change scenarios for the United Kingdom, UK Climate Impacts
Programme (2002) [http://www.ukcip.org.uk/scenarios] Back
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