The Royal Meteorological Society’s recent report into the ‘State of the UK Climate’ highlighted a concerning trend – increased extreme weather conditions driven by climate change.
Digging into the implications of the report for the insurance industry, James Adams (pictured right), senior associate at RPC, noted that for insurers of property damage and business interruption risks, this translates into the potential for more frequent and expensive claims arising from flooding due to wetter weather and subsidence during increasingly hot, dry spells.
“Although there is no upward trend in average wind speeds, the increased temperatures can lead to wetter and more energetic storms with greater potential to cause widespread damage,” he said. “Insurers need to reassess underwriting models, ensure premium adequacy, and collaborate with government policymakers on effective climate adaptation strategies. These changes underscore the importance of robust risk assessment frameworks that account for evolving climate conditions.”
Outlining some of the key ways in which warmer and wetter weather trends are exacerbating property damage risks in the UK, he highlighted that these are creating a dual threat for property damage.
On one hand, he said, heavier and more frequent rainfall increases the likelihood of flooding, particularly in urban areas with insufficient drainage infrastructure. On the other hand, hotter summers with prolonged dry spells, such as that experienced in 2022, exacerbate subsidence risks as soil shrinkage impacts building foundations. “Both phenomena strain existing property resilience and highlight the need for better urban planning and enhanced building standards to mitigate these risks.”
Touching on some of the pressing challenges these conditions are having on insurers and policyholders, he emphasised that insurers face challenges in accurately pricing risk in a rapidly changing climate. Historical data, once the bedrock of underwriting, is increasingly unreliable.
“For policyholders,” he said, “affordability and availability of coverage in high-risk areas are growing concerns. Both parties are grappling with the lack of widespread implementation of adaptation measures, which increases exposure and leaves assets vulnerable to extreme weather.”
There have been advancements in practical adaptation measures in recent years, Adams said, among them improved flood defences and innovative urban planning solutions that incorporate green infrastructure.
These measures not only mitigate flood risk but also reduce urban heat islands. Enhanced building standards, focusing on climate resilience, and improved early-warning systems for extreme weather events are also helping communities prepare and respond effectively. “However,” he said, “more needs to be done to implement these solutions on a national scale.”
Adams highlighted a noticeable shift towards proactive resilience measures, which he said has been driven by increased awareness of climate risks, the rising cost of inaction, and regulatory pressure, such as the reporting requirements under the Climate Change Act 2008.
“Insurers are encouraging policyholders to adopt measures like flood-resistant materials and improved drainage systems through incentives such as premium reductions,” he said. “However, further action is needed, particularly in aligning public and private sector efforts to scale up these initiatives.”
Addressing some of the long-term implications for insurers and policyholders if action isn’t taken, he said insurers may face unsustainable claims costs, leading to reduced market capacity or increased premiums, pricing some policyholders out of coverage. “Policyholders, in turn, will face greater financial and personal losses from property damage and business interruptions.
“Globally, unavailability of insurance for climate-related risks in some areas is a real possibility. This could lead, in time, to a need for new government-backed insurance schemes in the mould of Flood Re which assures the availability of insurance for properties at high risk of flood in the UK. The broader economic impact of a failure of governments to act could include diminished property values in high-risk areas and slower recovery times following disasters, further straining public resources.”
Looking to the future, Adams said he sees reason for optimism about the ability of the insurance industry to make meaningful investments to drive change. That includes integrating climate risk into underwriting practices and working with stakeholders on mitigation strategies.
“Insurers are already innovating in product design, offering coverage that incentivises resilience, and investing in AI and other technologies to better predict and manage climate-related risks,” he said. “While challenges remain, the industry’s ability to adapt and collaborate provides a strong foundation for addressing the risks outlined in the State of the UK Climate report.”