Property values in flood-prone areas are about to plummet as insurers refuse to provide cover. Across the country, insurance premiums are set to rocket to reflect the increasing risk of damage caused by storms, high winds, floods and droughts. The draconian new premiums could radically change the way buildings are specified and make some parts of the country no-go zones for development.
Last year was a bad one for the insurance industry: climate-related claims cost it more than £700m in the UK alone. But as the effects of global warming increase the severity of the climate, this figure is set to multiply alarmingly. In 2020, it is expected to top £1bn, and by 2050 the industry could be struggling to meet claims for more than £10bn a year.
Faced with this increase in risk, insurers are, unsurprisingly, looking to limit their liability. "Insurance companies have two options: either put up prices or pull cover. Anybody who tells you otherwise is lying because there is only so much money in the pot," says Julian Salt, project manager for natural perils at the Loss Prevention Council's Centre for Risk Sciences – the insurance industry's research organisation.
For developers, this could spell disaster. With an estimated 350,000 new homes earmarked for development on flood plains, housebuilders are vulnerable. At the moment developments in areas prone to flooding can still get reasonably priced insurance, but this is set to change. "It is imperative that appropriate flood defences are constructed or insurers might not want to issue cover on a property, and that will affect house prices," says John Parker, head of general insurance at the Association of British Insurers.
The ABI estimates that up to 1.2 million UK properties in inland areas are at risk of flooding, representing an estimated insured value of £35bn. Reinsurer Munich Re makes an even starker assessment: according to its annual review last year, almost 7% of the UK's building stock – worth £215bn – is at risk. Half of these properties are in the Thames catchment area, including Greater London. With no cover available, property prices in these areas will plummet.
But it is not just the domestic property market that stands to be devastated by the impact of climate-related claims; the commercial market, too, is under threat. Building owners, operators and managers will be affected as insurance rates rise or worse, insurance cover is removed completely, making many properties impossible to sell or let. Already, the Association of Chartered Certified Accountants is warning businesses to prepare for this. In its business guide to climate change it states: "The insurance industry may have to change the way it calculates premiums and, consequently, how much it charges businesses for insuring their livelihoods and premises."
"We take it as given that climate change is happening," says Parker. Extreme weather is becoming more common: more precipitation will lead to an increase in flooding and subsequent water damage to buildings; hotter, drier summers will cause clay soils to dry out leading to movement in a building's foundations, cracking in walls, damaged service pipes and even, in extreme cases, the collapse of entire buildings.
Rising ground temperatures will mean that ground contaminants will become more active, attacking a building's foundations. And an increase in the frequency of gales is expected to damage roofs and chimneys. "Most buildings under construction at the moment will still be in use at the end of the century so we are addressing a current issue, not a future one," says Chris Sanders at BRE's East Kilbride offices.
Robin Spence, director of the Cambridge University Centre for Risk and the Built Environment, says some of the smaller companies are "refusing to provide cover where there is the risk of flooding". Spence warns: "There have been cases where people have been told that their automatic cover won't be available for flooding after two years."
Insurance companies have two options: either put up prices or pull cover
Julian Salt, project manager for natural perils, Centre for Risk Sciences
Spence warned that the government may have to bail out property owners. "Insurers are thinking that if they withdraw cover, the government would be forced to pick up the tab – but there is no sign that the government is prepared to do that," explains Spence.
The AIB has given the government two years to provide adequate flood defences before it begins to exclude areas from insurance cover, either by not quoting at all or by offering prohibitive rates.
In future, insurance companies are likely to call the shots on the location of new development. The investment arms of insurance companies that hold shares in developers may insist developments are located in areas less susceptible to the changing climate. "There is the potential for them to flex their financial muscle and insist a development goes ahead in a less vulnerable area," says Spence.
Insurers will also increasingly change the way developments are designed and approved. "The insurance industry is lobbying to be involved in planning decisions," explains Spence. "The industry is also putting pressure on planners to take notice of the Environment Agency's flood-risk maps," he adds. In fact, this may already be happening. According to one source, a development planned for Peterborough on a site below sea level has been cancelled because insurers refused to provide cover for the scheme.
But flooding is not the only impact of climate change that will affect insurers. A report by BRE called Potential Impact of Climate Change in the Built Environment, part funded by the government, predicts that by the year 2050 increases in wind speed are likely to damage a million buildings each year in the UK alone – at an estimated cost of £1-2bn. The report estimates that subsidence on clay soils could cost up to £400m a year, the annual bill for maintaining roofs could increase by £2.5bn and the need to replace PVCu windows under increased ultraviolet attack could lead to a bill of £2.4bn a year.
Research by the insurance industry shows that even recently completed buildings are struggling to cope with today's weather conditions – even before the more extreme weather that will inevitably accompany climate change is taken into account. The Association of British Insurers' research report eight, Review of the Impact of a Variable and Changing Climate on UK Wind Claims states: "The extensive review of windstorm research by the Loss Prevention Council demonstrates the failure by the building industry and the regulations controlling it to implement required design codes."
With the impact of climate change set to increase, property owners need to act now to protect their assets and minimise their insurance premiums. Speaking at a recent conference on climate change and the built environment Martin Bradbury, director of asset management at United Utilities, said: "We will need to completely rethink the design and construction of our assets".
Insurers will also be getting tough on existing buildings. Proposals include encouraging owners and occupiers to maintain roofs, and increasing the standards for roof designs, installation and repairs. Salt suggests that this is the beginning of a tightening up of build standards and design codes. One strategy under consideration is "not to insure a property unless it is built to the highest standard". He suggests that the industry "should be building for climate conditions in 2080 – and they should be doing it now".
This will make it necessary for the government to carry out a review of the standards to which buildings are constructed. In fact, there has already been movement on this issue and the regulations that deal with the strength and stability of structure are under review, with the consultation document expected later this year.
