Are increased insurance premiums due to climate change inevitable?

As GHG emissions in our atmosphere increase each year largely in response to our use of fossil fuels such as coal, oil and gas, the impact on various sectors of the economy becomes increasingly evident. The insurance sector has a unique exposure to these changes and is one of the first to witness the real world consequences. With the rise in extreme weather events, and changes in our products and services, insurance companies are grappling with the consequences of climate change and its implications on both their business operations and insurance claims for the businesses they insure. Rising claims has consequences for insurance premiums. Insurance is a fundamental part of business and our lives from insuring buildings, transport, travel, to other assets and health. However with rising premiums, less people may be able to afford insurance. Without insurance, businesses transactions would soon seize up and insurance companies could also see drops in income. At Oakdene Hollins, we have been working with clients in the insurance sector to investigate how to engage with circular economy and sustainability to mitigate projections of ever higher insurance premiums in response to increasing risks and claims.‌

How have insurance claims changed?

2012- Insurers paid out £1.19bn for flood and storm damage in the UK in 2012 - at the time this was the highest annual figure for five years.. 486,000 claims were made by homeowners, businesses and motorists, according to the Association of British Insurers (ABI).

2016- Figures released by the ABI in 2016, following the floods caused by storms Desmond, Eva and Frank, suggested the average payout for each domestic flood claim was £50,000. The total payout by ABI members following these floods was predicted to be around £1.3 billion.

2020- £543 million paid in storm and flood claims following Storms Ciara, Dennis and Jorge in February 2020. In total for 2020, there was a 177 per cent increase in storm claims compared to 2019 and a 90 per cent surge in flood claims, claims data from Halifax Home Insurance.

2021- According to a joint report **from the Association of British Insurers (ABI) and **Flood Re, flooding is the ”greatest natural disaster” risk in the UK. The report suggests with losses of approximately £958m a year (minus defences).

2022- In February 2022 alone, the damage caused by Storms Dudley, Eunice and Franklin that hit much of the UK led to insurers paying out nearly £500 million in dealing with 177,000 insurance claims , according to figures out today from the Association of British Insurers (ABI).

2023- It was released by an insurance company that weather-related insurance claims have risen by 58% over the last three years alone.

There are several reasons why insurance claims in the UK related to flooding and weather-related incidents may have risen. Firstly, climate change has increased the frequency and intensity of extreme weather events, resulting in more frequent and severe flooding. This has led to a higher number of people making claims for damage caused to their properties. Additionally, urban development and inadequate infrastructure planning have contributed to increasing vulnerability to floods. The construction of homes and buildings in flood-prone areas without proper flood defences have left more properties at risk and susceptible to damage. Furthermore, aging infrastructure such as drainage systems and flood barriers are struggling to cope with the changing climate conditions, resulting in higher incidences of flooding. Lastly, the growing population and more comprehensive insurance coverage have also played a role in the rise of insurance claims related to weather incidents, as more individuals and businesses are financially protected and inclined to claim for damages. Overall, a combination of climate change, poor urban planning, aging infrastructure, and increased insurance coverage has contributed to the increase in insurance claims related to flooding and weather-related incidents in the UK. What however is notable, is that climate change can be linked to a number of these factors besides being a key factor itself.

Additionally, insurance companies can contribute to a sustainable future by incorporating the concept of sustainable claims into their practices. Sustainable claims involve reducing the carbon footprint associated with insurance claims by adopting environmentally friendly processes and materials. For instance, utilising digital platforms instead of paper-based systems, promoting virtual inspections and documentation, and sourcing reused materials for repairs could minimise the environmental impact of insurance claims.

The Net-Zero Insurance Alliance, established in 2023, is a groundbreaking initiative that brings together insurance companies dedicated to addressing the risks associated with climate change. With catastrophic events such as floods, storms, and wildfires becoming more frequent and severe, the alliance aims to play a pivotal role in driving the transition to a net-zero economy. By aligning their investment portfolios and underwriting practices with the goals of the Paris Agreement, these forward-thinking insurers are not only safeguarding their own business interests but also contributing to global efforts to reduce greenhouse gas emissions. Through collaborative research, risk assessment, and innovative insurance products, the Net-Zero Insurance Alliance is at the forefront of the industry's response to the urgent climate crisis.

With this being said, according to the Financial Times, the Net Zero Insurance Alliance could be at risk due to political interventions in the US. In addition, insurance companies currently face a lack of information and resources to adequately prepare for climate change risks and sustainable claims. This knowledge gap poses a substantial challenge as insurers aim to assess the potential impact of climate change on their portfolios and anticipate increased claims due to extreme weather events.

For a number of years, Oakdene Hollins has provided valuable support and expertise to insurance companies by bringing their expertise into cross-disciplinary forums, developing tools and metrics, and accelerating their adoption through procurement mechanisms. With most business, people, homes and more requiring insurance, the insurance sector has a crucial leadership potential. Therefore, if the insurance sector is successful, we could all benefit from a more sustainable economy with, lower insurance premiums.

As the frequency and intensity of extreme weather events increase, insurers may look to adapt their practices to address emerging challenges. Incorporating sustainable claims practices can help mitigate the environmental impact of insurance operations. Oakdene Hollins is glad to be working in the insurance sector and look forward to furthering preparation and understanding through science-led research and advice. By working together, the insurance industry can better prepare for and mitigate the challenges posed by climate change, ensuring a sustainable and resilient future.