Commercial Insurance Articles
Climate Change: The cost for landlords and insurers
02 Mar 2010
The big freeze has caused major disruption for individuals and businesses over the past month, as the country struggled to cope with an unusually long period of snow and icy conditions.
It is estimated that the cost to the UK's gross domestic product could be around £1 billion, although this will have a short-term impact on the economy, according to the Centre for Economics and Business Research.
Landlords may be among those to be hit by the effects of the big freeze if they have not taken precautions to protect their properties from the damage wrought by the likes of frozen pipes, heating system breakdowns, power cuts, blocked guttering and even possible comprises to security.
Although official statistics will not emerge for a while, insurance claims for burst pipes and water damage are likely to have seen an increase as a result of the bad weather, according to Steve Foulsham, technical services manager at the British Insurance Brokers Association (BIBA).
"Clearly burst pipes claims will only start to hit us once the thaw sets in and then of course it will take some time to get those through the system before they hit the insurers' statistics," he said.
Prior to Christmas, one insurer reported to BIBA that it had seen an increase in the number of burst pipe claims being made. Water damage represented one of the most prevalent claims that this particular insurer received on householders' accounts, Mr Foulsham revealed.
"If you look at water damage as an insured peril - and that of course would include flood - then certainly the level of those claims is increasing, no doubt at all," he continued.
It is not just heavy snowfall that has been a potential problem for landlords and insurance brokers, but also the issue of climate change generally.
The Environment Agency (EA) recently reported that the floods of summer 2007 cost the UK £3.2 billion. According to the review, about two-thirds of the total economic costs, or £2.2 billion, were incurred by households and businesses.
Around 48,000 homes were affected by the floods, which hit parts of Gloucestershire and the south of the east of the Yorkshire particularly badly, with the average cost for repairs to property standing at between £20,000 and £30,000.
Flooded businesses typically paid out between £75,000 and £112,000 for repairs. While 95 per cent of businesses were covered by insurance, a quarter of homeowners affected by the floods were not fully covered for flood damage, the EA reported.
The actual insurance payments made were 40 per cent higher than the agency's original estimates for the cost of damage of homes and businesses.
Power and water utilities assumed ten per cent - or £0.33 billion - of the total expenses, while communications, including roads, paid for seven per cent of the outlay and four per cent were incurred by local government authorities, with this figure excluding work on road damage.
In addition, to cost of damage to infrastructure such as roads, water supplies and power networks stood at £600 million, according to the EA.
"The high costs of flooding underline the importance for continued investment in reducing flood risk, particularly as climate change means that we are more likely to see more severe and frequent flooding in future," said Robert Runcie, director of flood and coastal risk management at the agency.
BIBA's Mr Foulsham said that such major weather events are likely to impact insurance in the future.
"I think if you ask any insurer, they will point to climate change as a catalyst for an increased number of certain weather-related claims because, particularly with the floods we've seen Carlisle, Cumbria, Boscastle, Hull and Sheffield in 2007, some of these one in 1,000-year events have become much more common," he commented.
The Association of British Insurers (ABI) currently has an agreement extending until June 2013, which says that all ABI members must continue to provide flood cover as part of standard home insurance policies.
However, that is on the understanding that the EA continue to put flood defences in place where necessary.
The agency's latest review of the 2007 floods stated that funding for defences needs to be doubled to £1 billion a year by 2035, or the average annual cost of flood damage could rise by 60 per cent over the next 25 years.
Mr Foulsham added that it was difficult to predict what would happen beyond the 2013 deadline for the ABI agreement.
"If climate change does really take off in some of the areas that we're being told it will do, in terms of extra degrees C etc [and] with all these number of storms and floods we can expect, then yes, I think insurers will have to look carefully at how they deliver that cover in the future," he commented.
Indeed, recent research by the ABI suggested that the average annual insured losses from flooding could rise by 14 per cent to £663 million. This is based on a four-degree rise in global temperatures, which could be seen as early as 2060.
In addition, the deficit associated with windstorms could rise by 25 per cent to £827 million due to changes in storm tracks along which cyclones travel, according to the figures.
However, at the moment insurers are not overreacting to the situation, he insisted.
"What we are beginning to see is some of the insurers increasing some of the level of water damage excess that they apply on household policies in particular," he added.
"I think that's a factor where there have been substantial water damage claims, but there is also this general uplift in excess level across the board, irrespective of where those particular properties may be."
The National Landlords Association has advised buy to let owners to take precautions to prevent their properties from suffering water damage.
It advised that pipes should be lagged and tenants should be shown where to turn off the water supply so that they can act quickly if a pipe bursts. This could potentially save thousands of pounds in repairs as well as an insurance claim for the damage.
Blocked guttering, cracks in the roof and missing roof tiles can also be a huge problem when it rains, so landlords should arrange for repairs to be carried out at the earliest opportunity, while guttering should be cleared regularly, especially in autumn.
