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This article first appeared in Insurance Day, December 2021.
From the wildfires sweeping across the United States, to the torrential rain and flooding which has devastated parts of Japan, never have we as a society been more aware of climate change.
Statistics suggest an undeniable upward trend in catastrophic events, with Munich Re reporting that numbers have almost quadrupled over the last two decades – from 250 in 1980 to 980 in 2020 – and continue to rise.
The construction industry and its insurers are facing mounting pressure to do their bit to mitigate risk or face the consequences.
Rising claims
It is inevitable that the escalating frequency and severity of climate change-related catastrophic events will lead to more claims against professionals, particularly construction professionals involved in developing innovative methods, designs or materials or those expected to design for a future climate, with largely untested technologies and little or no historical data on which to rely.
Take, for example, the Walkie-Talkie in London, which was dubbed the “Walkie-Scorchie” or the “Fryscraper” in 2013 after it created its own death-ray, focussing a ray of light onto the street below so hot that it reportedly melted part of a car. The designer – world-renowned architect Rafael Viñoly, said he “didn’t realise it would be so hot”.
Failures such as these can have costly consequences and it is imperative that construction professionals stay up to date with regulations, climate change technology and innovation to make sure they are properly considering the risks when designing climate-resilient buildings, and recording their decisions so that the project team is aware.
The Royal Institute of British Architects (RIBA) and the Institute of Civil Engineers (ICE) both demand that their members protect and enhance the natural environment. Stricter regulation of environmental building standards is inevitable.
Buildings are estimated to be responsible for between a third and a half of all global CO2 emissions and the construction industry, which has already started to use and understand greener materials, methods and technology, must continue to adapt.
Insurance industry response
Since the Grenfell tragedy in 2017, those involved in the design and construction of high-rise buildings (and, to a lesser extent, those not involved in those projects) have not just experienced increased premiums but have also seen insurers limit and contain their exposure to risk through the introduction of lower policy limits, higher excesses/deductibles/self-insured retentions, aggregate limits and policy exclusions.
When combined with the fallout of the Lloyd’s Business Review 2018 (which required loss-making Lloyd’s Syndicates to identify their worst performing 10% of business and establish a remediation plan), the looming date for implementation of the Building Safety Act and the growing threat of claims arising from climate change, the hardening market following Grenfell means that cover with the limits - and on the terms previously available - is now, and in the future, unlikely to be available and that navigating PII renewals will continue to be challenging.
Insurers are facing increased scrutiny in relation to financial risk from climate change and that scrutiny will be reflected in their underwriting approach.
On renewal, all professionals can expect to see closer examination of their risk management and governance concerning climate change. Those who take seriously their climate responsibilities – and, importantly, can demonstrate that they do – are likely to receive more favourable terms from insurers.
Proposal forms will contain questions concerning the insured’s ESG policies and insurers will expect their insureds to demonstrate a keen awareness of the risks to their business of a deteriorating climate, as well as their strategies for contributing to environmental improvements. Whilst those involved in innovative climate-friendly products and designs might be riskier in terms of claims numbers, their attractiveness to insurers as 'green risks' may mean their premiums are kept low.
Some PI insurers are adopting Climate Harm Exclusion clauses, which exclude cover if liability arises due to greenhouse gas emissions and/or where an insured has failed to reach greenhouse gas emissions targets. Such clauses are currently untested by the courts, but have the dual benefit of mitigating insurers’ exposure to climate-related risk whilst incentivising insureds to meet climate change targets.
Other insurers are developing new products, including cover for those involved in the carbon removal chain (also known as CCS – Carbon Capture and Storage) and funding disaster relief through catastrophe bonds (see, for example, Howden Group Holdings’ recent involvement in the volcanic risk catastrophe bond issued for the Danish Red Cross).
If tighter policy terms and the threat of higher premiums represent the “stick” available to insurers, they also have a “carrot”. Insurers are monitoring the changing regulatory landscape and leveraging their data to assess the increased future liabilities that these changes will bring. Whilst increasingly sophisticated climate change and actuarial models have, historically, underestimated the future risk of extreme climate behaviour, investment in these tools will undoubtedly help to predict future areas of risk for insureds.
Insurers can differentiate themselves by supporting their clients as they adapt to climate change through improving risk awareness and providing expert advice on risk mitigation. They can also provide thought leadership on climate change, sponsoring external research and collaborating with other stakeholders to influence political and regulatory change.
Read other items in Professions and Financial Lines Brief - May 2022
Read other items in the Construction Brief - March 2022
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