Fighting back

Second-guessing the British weather has long been a popular summer sport, but few sectors have as much at stake as insurance. Last summer’s shock floods across the North and Midlands cost insurers £3.4bn – which certainly puts that rained-off barbecue into perspective. As extreme weather becomes more frequent and less predictable, underwriters are working frantically to pinpoint the site of the next bout of losses.

But knowing where disasters will strike is only the first step, they also have to keep up with technologies to mitigate the impact or speed recovery. There’s also a longer term perspective, both a blessing and a curse for insurers. On one hand, they enjoy great influence over their customers and could contribute much to changing consumer behaviours. On the other, they must find a way to link more ‘eco-friendly’ behaviour with lower risks – not always an obvious match – and underwrite new, untested and potentially more vulnerable.

Drains take the strain: Traditional mapping information covers only river and coastal floods, but the real menace is water run-off from flash rainstorms – much harder to predict. Britain’s Victorian draining infrastructure is creaking under the strain of 21st century demands and populations far greater than it was designed to cope with. In 2005 Natural England, Defra’s land management agency, found that 12 square miles of gardens had been paved over in London alone, so torrents of rainwater gush into a drainage system that’s barely been upgraded since the city housed a population half the size.

Neither can insurers rely on information tied to postcodes, as they might include houses at the top and bottom of a hill with very different flood risks.

Topographic maps produced by aircraft using radar can show height variations to the nearest metre, but in cities, the beam will be blocked by tall buildings so pictures are blighted by shadows. This has prompted Norwich Union (NU) to invest in a more sophisticated method, using lasers, known as Lidar. It can show topographic details to within 15cm and, as it is directed downwards, perpendicular to the path of the aircraft, there are no shadows.

“It’s much more intense, and much more expensive,” says Simon Black, NU’s head of statistics and data. “The difference is huge. With radar you can definitely see land features but with Lidar you can see individual trees and houses. If you have two steps outside your house, it can work out the difference. That’s really important when you’re at risk of flooding because it doesn’t take much water to come into your house to cause a lot of damage.”

To give a rough cost comparison, radar data costs about £30-£40 per sq km. Lidar is many times pricier at £150-£200 per sq km, according to Infoterra which supplies geotechnical surveys to insurers.

NU buys Lidar data from third party firms such as Infoterrra and Intermap for particular areas at risk, and integrates it into its own systems.

Black says: “The important job is to quality check that data and make sure we understand it when we put it into our systems. In the Norwich Union Direct system, which we have total control over, we can differentiate between house numbers, when people come for a quote. Before, all those customers could have been tarred with the same brush because some houses in their postcode were at the bottom of a hill. Now we can say some of those people aren’t risky, so they can have a lower premium. It is definitely cost effective enough to make it worthwhile,” says Black.

Building up resistance: Predictions may help but they can’t stop extreme weather happening, so insurers are also devoting significant resources to helping buildings withstand its impact. Lindene Patton is chief climate change product officer in Zurich’s New York office and spends her time looking into new technologies that can help clients adapt to the many problems associated with climate change.

“Before, all those customers could have been tarred with the same brush because some of their postcode was at the bottom of a hill. Now we can say some of those people are not risky.

Simon Black, NU

Patton says: “The list is long and we’re still learning. In many cases, commercial customers come to us if they’ve identified a technology, or the purveyors of that technology will come to us. Also, if we’re looking at a building, we’ll support clients in protecting themselves against climate change. We do it as a support to underwriting.”

Clients’ own efforts may be reflected in rate adjustments, but Zurich will also provide advice to larger clients on alterations to their buildings.

Property is a major focus of Patton’s research. “One of the big issues we face with climate change is the increasing frequency and severity of storms and other aggressive weather events. Properties are now exposed to physical conflicts they haven’t been exposed to before, or are more severe.”

For example, she looks at how roofs are attached to buildings – there’s often an overlap for storm winds to whip underneath and tear off poorly fixed materials. “Some roof attachments give greater strength than others to make sure a roof stays on. It’s not just the construction materials but how it’s assembled. The exteriors of buildings have places where wind can get behind to exert a force. You can also find customers with an exterior of glass – in a storm, anything could be picked up and smashed into windows. A regular window will shatter, but missile-resistant glass, a bit like car windscreen glass, will just splinter."

Customers are advised not to store high value or business critical equipment in the lower floors of a building, or to install ‘submarine doors’ to create a protected dry space for, say, the power generators in a hospital. Some of Patton’s discoveries are counter-intuitive and the demands of different weather events can be contradictory – structures in flood prone areas need to be able to bend, for example.

She explains: “When a wave comes in, it can be several hundred miles an hour, which is a lot of weight. We want to make sure the water can pass through. When you get that much water and it meets resistance, it puts a lot of stress on the foundations, and you don’t want to put the rest of the building at risk. It’s the opposite from protection from high winds.”

Insurers in temperate Britain may not have to worry about the more extreme ends of the weather spectrum, but for Patton, thawing in places like Alaska is a real concern.

In particular, there’s a phenomenon called ‘freeze heave thaw’, where water melts and refreezes rapidly and changes its volume, leaving the ground unstable and endangering buildings’ foundations. “That’s an issue where structures are dependent on being in a permanently frozen environment. It may change client exposure at particular latitudes. The flipside is where there’s more drought, and we have to start looking at technologies that support more grey water recycling.”

On the more proactive side, Patton says there’s a practical use for microgeneration technologies such as solar or wind power in disaster areas.

“There are well documented examples in the Caribbean, where people who had independent power generation through solar panels were back up and running faster than anyone else. They don’t have to wait for the infrastructure to be repaired.”

“When a wave comes in, it can travel at several hundred miles an hour, which is a lot of weight. We want to make sure the water can pass through.

Lindene Patton, Zurich

Zurich also has a 10-strong team focusing solely on insuring alternative energy firms in the UK and US. “We’re making sure we understand how the technology works, how exposed it is to different events, what would happen if there was a climatic event. We also have to understand the environment in which it’s deployed culturally and legally too.

There has been a lot of work done on the legal rights to fossil fuels concerning extraction, mining and delivery, but that’s yet to be defined in relation to renewable resources. Who has the right to the wind or the sun?”

Another of Zurich’s more forward looking programmes is a ‘green rebuild’, at the moment available only on a bespoke basis to commecial clients. Customers who sign up to the product can have their damaged premises repaired to eco-compliant building standards such as the US Green Building Council’s Leed ratings. But those same eco-building methods are causing headaches for insurers here in Britain. In recent years, government policy has encouraged the use of ‘modern methods of construction’ – a euphemism for prefabrication.

Factory-built structures, such as timber-frame or modular construction, are quicker and cheaper to assemble on site and can provide higher levels of insulation than traditional brick or concrete buildings. For insurers trying to determine their rebuild value, however, they present a problem.

“Modern methods of construction are a big issue for us,” says Andrew Miller, risk control manager at Allianz UK, who leads a team of surveyors looking at the risks from fire, flooding, security and health and safety.

“There’s not enough case history of these buildings suffering losses so we don’t know how they react in a fire or a flood. We don’t charge higher premiums, but whether we should is another matter. There have been single storey timber-frame buildings for years, but now they’re seven, eight or nine storeys high – basically a big pile of timber. Fires can spread quite rapidly.”

Miller says the rebuild value of such properties is another unknown factor. Will modular structures have to be dismantled so a replacement pod can be inserted? How well will new insulation materials dry out?

“There’s a whole range of sustainable materials used in construction, we get all sorts – straw bales, sheep’s wool and crushed paper. They have to meet the building regulations, but it doesn’t mean the buildings won’t burn down. Polystyrene is a good insulator but it burns pretty nastily and gives off toxic smoke. If it’s sandwiched between other materials, that can mitigate the effects but it will still burn whereas mineral wool won’t. We’d rather see a building made of non-combustible materials.”

Miller isn’t sure how many of the new buildings Allianz insures are constructed using modern methods, but he guesses it’s about half. “Once they’re built, it’s hard to tell what’s behind the cladding without drilling a hole. Brick fascias look like brick. It’s difficult to find the plans for a building that’s four or five years old and the builders might have gone bust.”

Enticing customers to go green: Whatever the difficulties of assessing their rebuild value, green buildings are at least relatively easy to identify. It’s much harder to say what a green insurance product would look like, and to make it commercially viable.

“For Tesco, it is easy, it can just do a special offer on energy efficient lightbulbs. It is much harder for us.

Paul Pritchard, RSA

This is the challenge RSA set itself when it signed up to Tony Blair’s Together initiative last year, which aims to provide consumers with goods and services to encourage them to take action on climate change.

“For Tesco, it’s easy, it can just do a special offer on energy efficient lightbulbs,” says Paul Pritchard, corporate responsibility manager at RSA. “It’s much harder for us.”

Pritchard started by offering discounts for low emissions vehicles and hybrid cars. “Intuitively you might think drivers of these vehicles are lower risk anyway, but we didn’t pitch it like that. We have not actually worked it out.”

A few months ago, RSA launched a more ambitious scheme, Green Wheels, which uses a soon-to-be patented version of satnav technology to monitor how the owners follow the principles of ‘eco-driving’. “There are things you can do – don’t make too many short journeys, don’t over-rev the engine and don’t brake too fast,” explains Pritchard.

“We used our experience of the telematics [pay as you drive] boxes to measure specific factors that relate to eco-driving and give drivers access to that over a secure website. The boxes are installed under the bonnet at no extra cost to consumers, and you don’t notice it when you’re driving.

“When you’re confronted with the number of short journeys you’ve made and the number of times you’ve braked hard or gone too fast, it does make you think. Intuitively it might appear likely that an eco-driving style should be safer. We’ll measure the data as it comes through.”

But when it comes to home insurance, Pritchard has been struggling to think of viable products that can help. He says: “There’s a lack of obvious links between insured risk and sustainability. If people use less energy in the home, you wouldn’t particularly think that would lower the insured risk.”

In fact, many perceived home improvements like wind turbines have the opposite effect. “People come to us and say, ‘can I get a reduction in my premium if I put a wind turbine up?’ But looking at the pure underwriting perspective, they can increase insured risk. I put quite a lot of effort into looking at it. It’s not as easy as you might think,” Pritchard says.

The best compromise Pritchard has come up with so far is offering customers Marks & Spencer vouchers if they participate in an online survey from the Energy Savings Trust in the hope that they will take its advice.

In the meantime, Pritchard is turning his attention to an area where he can directly reduce CO2 emissions – a green refurbishment of RSA’s own offices in Horsham.