Impact of climate change on insurance claims – views from Canada and the UK

This article originally published in Insurance Day. It was co-authored by Cecilia Hoover, Partner at Dolden, Wallace, Folick in Canada. Kennedys and Doldens formed an association in July 2020.

It is estimated that extreme weather events cost the world US$150 billion in 2019.

In Canada, insurers are facing mounting pressure to re-evaluate traditional products which often insufficiently respond to the property losses experienced by their insureds as a result of natural disasters such as the recent hail storm in Calgary which led to estimated losses of $1.2bn.

Insurers may wish to consider specialised allowance reserves to compensate for these natural disasters with corresponding premiums. The key to developing the proper model to respond to these types of losses may be a generous estimation and reserve setting early on. While the short-term effect might not be ideal for the books, a long-term outlook should be taken with a view to avoiding devastating upticks on unexpected claims.

In order to significantly decrease the occurrences and effect of all disasters (natural or man-made) Canada’s federal, provincial and territorial ministers collectively developed and approved An Emergency Management Framework for Canada in 2017 (the Framework). The Framework places more prominence on risk assessment, prevention and mitigation rather than on response and preparedness.

In terms of hail storms and consequent damage, preventative measures in the Framework include implementing ‘cloud seeding’, a process by which silver iodide or dry ice is placed into clouds to force the release of precipitation. This has been undertaken and funded by governmental agencies and insurers. This should help to reduce the frequency and severity of disastrous hail storms.

Pursuant to the Framework, each province and territory establishes its own emergency management and disaster relief protocols and measures. The Alberta government, for example, will tap its disaster relief fund to pay out residents of Alberta who experienced uninsured losses in the July 2020 hailstorm. One of the objectives of the Framework is to allocate funds up front to preventative measures and significantly save on the response ‘end’ with relief payments. However, with total losses estimated at $1.2 billion, it remains unknown how much the Alberta government will disburse in payments for the Calgary storm.

Closer to home, the 2020 floods in the UK were the result of record-breaking rainfall estimated to have cost the UK insurance industry approximately £400m.

The Environment Agency reports that 5.2 million properties are at flooding risk, with 500,000 at ‘significant risk’. This is against a backdrop of predicted rainfall to increase 35% by 2070.

With subrogation possibilities often limited for insurers combined with a potential rise in public liability nuisance type claims from flooding, if nothing is done, future losses for business and the economy are only expected to grow. However, steps are already in place to reduce this risk.

Whilst the 2020 floods were costly, the Environment Agency says that the economic damage would have been at least 14 times greater had the current flood protections not been in place. They estimate that for every £1 spent on protecting communities, around £5 of property damage is avoided.

In the March 2020 Budget, the government committed to doubling expenditure on flood and coastal risk management to £5.2 billion between 2021 and 2027, saying this will better protect a further 336,000 homes and properties as well as avoid £32 billion of wider economic damages to the nation.

In July, the government laid the Revised National Flood and Coastal Erosion Risk Management Strategy for England before Parliament. It sets out strategic objectives and measures (with target dates up to 2050) for achieving its long-term vision, namely: “a nation ready for, and resilient to, flooding and coastal change today, tomorrow and to the year 2100.”

The strategy has three core ambitions:

  1. To work with partners (including insurers) to bolster resilience to flooding and coastal change across the nation, both now and in the face of climate change.
  2. To secure sustainable growth and environmental improvements, as well as infrastructure resilient to flooding and coastal change.
  3. To ensure local people understand their risk to flooding and coastal change, know their responsibilities and how to take action.

As such, insurers are looking to incentivise insureds to adopt flood resistance and resilience measures to help manage their exposure to flood.

Although the commitments within the strategy are currently vague, it is clear that all organisations involved have their own accountability requirements. This potentially opens up liability (and recoveries for insurers) if they fail to adhere to their requirements.

Alongside the Strategy, the Environment Agency is developing an action plan to help implement the strategy which will be published by April 2021.

For now, insurers need to continue taking steps to manage their risks and ensure their policy wordings are tight so they don’t cover wider losses (such as environmental claims from resultant pollution from flooding) if they don’t intend to do so. Likewise, they need to ensure their supply chain can cope with wider flooding events to allow businesses to be back up and running quickly.

So, for all the doom and gloom perhaps, so far as flooding, the strategy may offer a silver lining after all. Insurers will certainly hope so.

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