Back to GIRO home page

GIRO 2007 - Property Insurance Issues

Property insurance is a contract to indemnify (or some provide some function of indemnification to) the policyholder - generally the owner of the property - if a certain type of event occurs. Some of these events, such as theft, are driven by social or economic factors.

Many events covered by property insurance, however, are weather-related: storm, flood, freeze, hail, subsidence and so on. They are driven by extreme weather events, which means that the losses on property insurance accounts tend to be volatile by time and by region: since this is the nature of extreme weather. Losses are correlated with one another, and individual weather events can hit property accounts hard. This can greatly affect returns on these accounts, and drives the major need for capital backing of property insurers.

Climate change will bring - and few would now be prepared to argue with the premise that it is already bringing - an increase in extreme weather events. Increasing average temperatures are not a huge concern per se to property insurers. But riding on the back of those temperatures are:

Rising Sea Levels: from thermal expansion and ice melt;

Increasingly intense rainfall events: warmer air is capable of holding more moisture, which can be deposited as heavier rain (or hail);

Stronger storms: heat is a form of energy. This can be converted to the kinetic energy of windspeed in a tropical storm. Warmer air means more energy;

Volatile freeze and snowfall events: although mean temperatures are rising, so is the variance, leading to occasional bursts of cold weather. There have been a number of very heavy snowfall events in recent years;

Heatwaves and droughts: these are already becoming more intense across many parts of the world.

As these extreme weather events increase in frequency and severity, it will continue to lead to more volatile and catastrophic losses on property insurance accounts. Perils that are likely to increase in cost include:

Flood (Coastal): potentially devastating if sea level rise really starts to kick in;

Flood (Riverine): particularly an issue in the UK, where flood is a standard cover under home insurance;

Flood (Localised): as thunderstorms increase in intensity;

Storm: more violent wind speeds. Losses increase dramatically as a power function of wind speed. Builders have been occasionally known to use the laws of supply and demand to their advantage in these situations, increasing loss costs;

Hurricanes: same as storm, but can lead to catastrophic losses. The range of hurricanes is also likely to increase, leading to previously temperate cities such as New York becoming new areas at risk;

Subsidence: due to hotter, drier summers shrinking clay soils;

Hail: crops in particular can be devastated;

Alternative Accommodation: recent examples of New Orleans and Hull show that beyond a certain 'tipping point', the infrastructure of society itself starts to break down. This can increase losses substantially;

Business Interruption: flood damage in particular can take a long time to put right. SMEs are especially at risk of going under (no pun intended) in this period, if they have no disaster contingency plans;

Weight of snow: warmer air holds more moisture. But where precipitation occurs over cold ground, eg mountains, this can still fall as snow. There have been recent cases in Europe & Japan of very heavy snowfall;

Liability: see the liability page of this wiki.

Property insurers are therefore taking increasing interest in assessing these new risks in their pricing, underwriting and reserving.

Back to GIRO home page