How Climate Change Is Impacting Insurance: A UK-Specific View
The insurance industry generates more than $5 trillion in annual revenue according to insight from McKinsey & Company.
Statista explains that in the United Kingdom, this industry is Europe’s largest and the fourth largest in the world. In 2018, the UK’s insurance sector directly employed over 94,000 people and 2019 saw tax contributions reach approximately GBP 75.5 billion, the largest contribution of any sector within the country. The UK insurance sector was also a world leader as an exporter of insurance to the rest of the world. The UK is unique in terms of its insurance category breakdown. The NHS provides universal healthcare ergo private health insurance is not a substantial portion of the insurance market unlike the United States where there is no universal healthcare legislation. As a result, the US health and medical insurance industry measured by revenue is $1.1 trillion according to IBISworld.
In the UK, property and motor insurance take up considerable market shares. This sector is classified as non-life and the UK is the biggest non-life insurance market in Europe valued at 111.7 billion euros. The property segment was nearly one-fourth of the EU market in 2018, while the motor segment stood at 14.4%. It is the property segment that this piece wants to focus on in relation to climate change.
A 2019 AON report gives some insight into this: 6 of the top 10 costliest disasters of 2019 were flood-related, with inland flooding being the costliest individual peril at $82 billion. For Europe, last year’s Winter Storm Eberhard caused insured losses of between 900 million to 1.5 billion euros according to AIR Worldwide the American risk modelling company. That report notes that a majority of the losses will be concentrated in Germany but they mention that Eberhard followed storm Freya/Bennet which affected Wales and England on 3rd March which brought strong winds and flooding.
The FT quotes natural catastrophe modelling specialists who say global warming means that flooding is likely to become more frequent. Warmer air holds more moisture, leading to wetter and more frequent severe storms. Now this is a less cited fact when compared to the often-appreciated and cited risk of rising sea levels by virtue of the melting polar ice caps and sheets. In a 2020 piece, The London Economic cites a 2019 sky news article that says 1500 people were evacuated from Whaley Bridge, Derbyshire, over fears that the Toddbrook Dam could break and submerge the town. Estimated repairs could take years and the costs are predicted to run into the “hundreds of millions.” Clean up and rescue operations cost Derbyshire County Council GBP 700,000 citing the Buxton Advertiser.
Association of British Insurers says the 2018 UK extreme freeze resulted in insurers paying a record amount for burst pipes — GBP 194 million in a three-month period and 2018’s extreme heatwave led to more than 10,000 households needing to claim for damage caused by subsidence, at a cost of more than GBP 64 million.
The Bank of England recognizes this risk and has told British banks and insurers to implement their plans for dealing with climate change business risks by next year. The Bank has proposals to test the performance and health of the UK financial system for a range of climate-linked financial risks, including the failure of governments and consumers to take action.
The testing will cover three scenarios, including “early policy action”, where the transition to a carbon-neutral economy is clear and decisive, resulting in the global temperature rise staying below 2C, in line with the Paris Climate Agreement
In a second “late policy action scenario”, global climate targets will also be met, but the transition will have been delayed by 10 years, leading to more drastic and immediate action that could cause an economic shock.
In the final scenario, governments fail to introduce policies to address the climate emergency, and companies and consumers do not change their behaviour. Global temperatures increase “substantially” — by about 4C — by 2080, resulting in rising sea levels and more frequent, extreme weather events such as flash floods.
Drastic environmental changes around the world would damage property, infrastructure and farmland, disrupt business supply chains, and lead to mass migration and deaths, the Bank said. “This reduces asset values, results in lower profitability for companies, damages public finances and increases the cost of settling underwriting losses for insurers,” it said. Spill-over effects such as lower output and productivity would compound those problems.
It is in the insurance industry’s interest to push for concrete governmental action on climate change. If governmental intransigence stalls progress, then insurance companies can do their own bit to mitigate these disasters. By divesting from fossil-fuel industries, they will demonstrate that they have done their part to speed up the transition to a low or no carbon economy. As of a 2018 report, UK insurers alone hold over GBP 1.8 trillion in invested assets. Currently, only around 1.2% of all assets under management in the UK are invested in Environmental, Social and Governance (ESG) assets such as renewable energy.
Is this a silver bullet? No. But is a step and a huge one given the market-moving financial strength of this industry ($5 trillion as aforementioned). To borrow an apt analogy from foreign policy you stop terrorism by not arming rebel groups who often turn these weapons on the West. A drastic analogy but succinct. Because you can only control what is in your sphere of influence and similar to when a government refuses to arm rebel groups, the insurance industry can refuse to invest in fossil fuel energy sources. Will there still be incidents of terrorism? Yes. But incidents that cannot be attributed to foreign policy blowback. Will there still be incidents attributed to climate change? Yes. But those not attributed to insurance company investments in these industries. This is the synthesis. The commonality is that both the government and the insurance industry will have a clean conscience (and in the case of the insurance industry, additional revenue)