Hurricanes and UK Insurers

The devastating events from recent hurricanes in the US and the Caribbean demonstrate the power of extreme weather events and the need to ensure that society is adequately prepared.

Costs

Insured losses from Hurricane Katrina could total $40-60 billion from wind and storm-surge damage to property and vehicles and associated business interruption, making it the largest insured event on record.
 

The US Government’s federal insurance programme for flood cover could pay out an extra $10 – 12 billion.  Around half the households in New Orleans had purchased flood cover through this programme.

Insured losses from Hurricane Rita are expected to total $3 - 6 billion, and those from Hurricane Wilma $6-10 billion.

But many uncertainties remain in these estimates. Lack of access makes the full scale of damage hard to assess, and the split of flood losses between the insurance industry and the federal programme is unclear.

Impact on the UK insurance industry

Despite their immense costs, Hurricanes Katrina and Rita should not have a major impact on ABI members.  Even UK-based ABI members writing business in the US do not expect significant repercussions for their UK customers.

A substantial part of the costs of Katrina, Rita and Wilma will be picked up by global reinsurers - that is, the insurers' insurers. Around 5 - 10% of the property premium of a UK policyholder covers reinsurance costs. If the costs of reinsurance increase because capital becomes more limited, this could be reflected in some increase in the costs of UK insurance. But prices may not necessarily increase, because reinsurers may find Europe and the UK more attractive markets for their capital. At this stage the full financial impacts are still very uncertain.

Lloyd's of London

Lloyd's provisional estimate remains that the market's net loss as a result of Hurricane Katrina is £1.4bn ($2.55bn). A statement from the Society was issued on 14 September 2005.


Impacts on travel insurance

For those who have had their travel plans disrupted as a result of the hurricanes and have a travel insurance policy in place:

- Many tour operators are rearranging future trips to the affected countries.  Your travel insurance policy can normally be transferred to the new destination, often without extra charge.
- The scope and level of cover will vary between policies so it is important that you carefully check your policy documents for detail of the cover provided.  You should contact your insurer if you are unclear of any aspect of your insurance.


Are recent severe hurricanes proof of climate change?
Further information about ABI's work on climate change is available.

A single weather event cannot be attributed directly to climate change and even one bad season is not a significant indication.  However, this type of more severe weather is consistent with the current scientific consensus on the impacts of climate change (see graph below showing changes in frequency of hurricanes over time). Fortune magazine has recently carried a useful story on these trends.

A recent ABI report showed that even small increases in the severity of extreme storms could increase average worldwide damage by two-thirds by the end of the century.


Could the same happen in the UK?

Further information about ABI's work on flooding is available.

No matter how well we protect people, property and infrastructure against windstorms and flooding, we will experience extreme events – for example, the flash-flooding in Boscastle in August 2004 and North Yorkshire in June 2005, and the Birmingham Tornado in July 2005.
The chance of a significant coastal flood is small.  But we cannot be complacent, because the consequences could be substantial.  There are £125 billion of assets in the tidal floodplain in London. 

In the UK, coastal towns are generally protected from a storm-surge to a standard of at least 0.5% annual probability (1-in-200 year chance).  London enjoys an even higher standard - 0.1% annual probability (1-in-1000 year chance).  However, if defences are not upgraded, climate change could reduce these standards to around 2% (1-in-50 year chance) by the end of the 21st century.
The Government’s step-increase in investment in flood management over recent years, reaching a record £570 million in 2005-06, is doing much to address inland flood risks. Looking forward, this increase in spending needs to be sustiained 

But we cannot rely on flood defences alone.  We should strengthen the land-use planning system to prevent homes and businesses being built in inappropriate parts of the floodplain.  According to ABI research, sensible land-use planning could reduce flood costs from the new developments in Ashford, the M11 Corridor, and Milton Keynes/South Midlands by more than 90%, and the costs in Thames Gateway by around half.

(Report by The Association of British Insurers)