The UK weather is renowned for its unpredictability. A beautiful, sunny sky can quickly give way to relentless rain, leading to sudden and unexpected floods.
For most of us, the impact of this is usually limited to taking a detour around flooded roads. But for those living in high-risk areas, flooding can cause devastating damage to homes.
The Energy and Climate Intelligence Unit estimates that significant flooding could impact up to 3 million people across the UK by the 2050s if temperatures continue to rise at their current trajectory. At the time of writing, around 35 million insurance policies are active in the UK. That means climate change could impact nearly 10% of all customers.
With more properties becoming high risk, it’s becoming more challenging for insurers to offer appropriate coverage to consumers. This means that more insurers are rejecting higher risk applicants and adding exclusions (such as no cover for floods in a high flood-risk area).
And for the insurers that will offer high-risk cover, the costs can be unaffordable to the customer.
So how is the insurance industry adapting to the impact of climate change?
In this article, I’ll cover:
- How is climate change impacting the insurance industry?
- What can home insurers do to adapt?
- What is Confused.com doing to adapt to climate change?
How is climate change impacting the home insurance industry?
We’ve all read the stories of recent extreme weather events such as heat waves, wildfires, and flooding across the world due to an increase in global temperatures. Here are 3 ways I believe the changing climate will further impact the insurance sector:
1. More people in high-risk areas will struggle to get home insurance
Properties in high-risk exposure areas are understandably unattractive to insurers. And with climate change, more people are finding that they’re now living in places with high risks for natural disasters like floods, wildfires, and severe storms. Multiple environmental agencies agree that the number of houses at risk of flooding is on the increase. Residents in these areas could find it harder to get house insurance.
This is already happening across the pond in California, where the residents have faced relentless wildfires. Major insurers (such as State Farm) no longer cover any homes in California. And while the UK isn’t quite at that stage, there are signs that floods will become even more of an issue for us. According to the Met Office, there’s a direct correlation between increasing temperature and extreme rainfall events. On top of this, they’re expecting an 11-16cm rise in sea levels around the UK by 2030, which will heavily impact coastal communities.
2. Climate change risk could reduce the perceived value of insurance
Insurance premiums are already going up due to inflation. Premiums at the end of 2022 were up 6% on the beginning of the year, and by December 2023, the average UK home policy might cost £103 more than in 2021. If the consumer also lives in a high-risk area, they could see their policy price skyrocket.
In the face of climate change, insurance companies might become pickier with their customers and add more exclusions. For instance, if a customer lives in an area that has a risk of wildfires, their insurer might not cover wildfire damage in their policy. And if our customers are already facing higher premiums and also have to deal with more exclusions, then it's no surprise that they’ll see less value in their policy.
3. More government intervention will be needed
As the UK landscape changes due to climate change, there’ll be a greater need for cooperation between the insurance market and the government. This is already happening in the UK with the Flood Re scheme. With Flood Re, every insurer offering home insurance must contribute to the scheme in cooperation with the government. This £135 million annually helps cover high-risk areas.
For customers who live in high-risk areas, more government intervention will be required to make home insurance affordable for them.
What can home insurers do to adapt?
Climate change is already significantly impacting our industry. But it’s not all doom and gloom, and there are ways we can still be proactive.
Here are some ways that insurers can change their practices to better manage the risks associated with climate change:
Expand the risk assessment criteria to cover more people
Conventional risk modelling sometimes fails to provide an accurate assessment of the risk associated with a particular individual and property. This can result in overly strict requirements for getting insurance.
By asking more detailed questions and expanding the climate-related risk assessment criteria, insurers can offer more people more affordable cover. For example, insurers might ask homeowners in areas prone to flooding if they’ve installed preventative measures, such as floodgates. This makes the property a lot less risky than the house next door that hasn’t added these measures. As such, the insurer should be able to offer the customer a cheaper premium.
Another approach could be to introduce parametric pricing, where policyholders are insured against events of a certain magnitude (such as wind speed, rainfall, or earthquake magnitude). Parametric pricing for weather events could offer customers more flexible policies and be more cost-efficient for the insurer. For instance, if only significant storm damage is covered (such as number 10 on the Beaufort scale), the insurer can take on less risk and the customer has the option of a more affordable policy (albeit, with less cover).
Get boots on the ground so customers see the value of their policy
Having representatives on-site during major climate events can be incredibly powerful. Some insurers have adopted this 'boots on the ground' approach, deploying mobile units to assist and advise policyholders during events like floods or storms.
Though this is more of an exception than the rule right now, it's an approach that can enhance customer trust. By having a task force that’s physically present for your customers in their time of need, you can help people appreciate the value of their insurance policy.
Educate your customers to reduce their claims risk
Insurance providers can use their marketing channels to guide customers on how to prepare for climate change, such as advice on mitigating climate risks by reinforcing basements, installing floodgates, and replacing air bricks. By educating policyholders, insurers can improve their customer experience and value proposition while reducing the financial risk of covering these properties.
Advocate for policy changes so vulnerable consumers can access insurance
Insurers have significant influence and can leverage this to advocate for policy changes that directly affect customers and the industry. Examples include pushing for continued funding for coastal sea defences or advocating for more schemes like the Flood Re scheme.
What is Confused.com doing to adapt to climate change?
At Confused.com, we recognise the increasing challenges climate change poses, especially for homeowners who’ve already experienced flooding and are deemed especially high-risk.
Last year, we received about 15,000 quotes where the customer had a history of flooding at their property, with 40% of those incidents occurring within the last decade. Despite this history, we were able to provide 16 prices from different providers for those customers, allowing us to still provide insurance for those who needed it.
The key to our approach is to seek detailed information about each specific case and ask many more questions when a customer signs up. Say, for example, a customer has a property with a history of damaging floods. In that case, we’ll ask about preventive measures that the homeowner might have installed since then, such as flood barriers, covers for air bricks, and elevated electrical systems.
By asking more detailed questions, insurers on our panel can do more accurate underwriting, and therefore offer coverage in most circumstances.
Insurers and PCWs need to be proactive about climate change
The increasing frequency and intensity of weather-related events are reshaping the risk management landscape. The insurance industry needs to adapt if it wants to continue to provide coverage. While these challenges are significant, they’re not insurmountable.
By proactively broadening risk assessment, deploying teams, educating clients, and promoting policy changes, home insurers can continue to service customers in high-risk areas.
At Confused.com, we believe that with collaboration, innovation, and a steadfast commitment to our customers, we can effectively adapt to the challenges of climate change.
Discover more about how we're working towards a better future at Confused.com.
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