As the UK was plunged back into the freezer last week, with temperatures hitting lows of -12˚C in parts of England, insurers were not only bracing themselves against the bitter cold. The freezing weather raised the threat of yet another surge in weather-related losses. Claims for snow, ice and water damage last winter exceeded £1.4bn and 1.5 million homes were affected, according to the ABI.

With this following an increase in the incidents of severe flooding over the past decade, peaking with the devastating floods of 2009, have lessons about extreme weather been learned by both insurers and the insured? We assess the UK’s preparedness to deal with what the weather may throw at us next.

First, to gauge what the insurance industry is facing in terms of claims terms right now, the winter of 2011/12 began mildly in Britain. The average temperature in December 2011, for example, was 12.7˚C, whereas in December 2010 it was -1˚C, the coldest since Met Office records began in 1910. But the recent cold snap looks likely change the picture. Loss adjuster QuestGates director Simon Jones says: “We have seen a spike in burst pipe claims in the last two weeks.” The gales in early January will further add to average claim levels for this winter.

For example, Swiftcover saw claims spike by 250% on 3 January, according to personal finance website Myfinances. The insurer estimates that the average cost of a claim was almost £1,000 and says that most were for water damage and damage to conservatories and roofs.

The danger is that if the present cold snap continues, this will be too much for insurers”

Mohammad Khan, PricewaterhouseCoopers

The motor market took a hit in January too. AA Insurance spokesman Ian Crowder says: “Vehicles can be affected by severe weather. Floods can ruin vehicles and we’ve seen claims for hailstones the size of golf balls denting cars.” In line with this, the AA found that the storms during the first five days of 2012 brought a 28% rise in car insurance claims compared with the same period last year. The broker reported, among a wide variety of claims, a high incidence of damage wreaked by airborne trampolines.

The AA recorded 991 claims over the period, which it says suggests, based on its market share, that the wider industry will have seen more than 5,600. However, these events alone are unlikely to create more claims than the industry can handle. Aviva underwriting director Simon Warsop says: “The weather so far this winter has not been outside what we would expect.”

But what if the unexpected occurs, as it did over the last two winters? PricewaterhouseCoopers insurance partner Mohammad Khan says: “The danger is that if the present cold snap continues – say for a month, as some forecasters are predicting – this will be too much for insurers. We’ll see another surge in winter claims in March and that will be beyond what insurers were expecting.”

Damage limitation

With the threat of further severe weather a distinct possibility this year, it’s worth looking at just how much damage – and therefore insurance claims – could occur.

The good news is that the UK has become better at combating extreme weather. For one, many of the pipes prone to bursting will have done so by now during the past couple of big freezes Aviva’s Warsop says: “These will have been replaced with more up-to-date pipes, which are significantly less likely to burst.” Encouragingly, building regulations have increased the levels of insulation recommended in new buildings, while works to existing properties (in roofs, walls, floors, ceilings and so on) mean pipes across the country are becoming increasingly better insulated. On the other hand, Jones warns that a consequence of increased internal insulation can be that the roof stays extremely cold, which can lead to pipe bursts. However, “in modern housing, usually, pipes in the roof are themselves insulated, so this is not such a big risk”.

Less positively perhaps, the building regulations have not been adapted in response to recent cold snaps. The increased requirement for insulation is not aimed so much at mitigating the effects of cold weather as to meet environmental concerns. Building regulations consultancy NHBC manager Steve Evans says: “The regulations follow long-term trends. A couple of severe winters are not enough for them to change - after all, another big freeze might not happen for 20 years.” As for new regulations to make properties more resistant to high winds, Evans says: “It’s not even on the agenda.”

The building and planning sector is doing more to combat floods, meanwhile, but insurers and brokers say it must go further (see ‘Floods: Can insurers cope with the next inundation?’, page 34).

Insurers’ response

If the nation is far from weather-proof, then, how are insurers responding? There has been some movement in rates: The AA’s British Insurance Premium Index shows that home buildings premiums in the UK rose by 9.5% in 2011, while the cost of contents cover rose by 11.2% (to £157 and £81 respectively). Plus there has been some movement in motor, as reported widely. However, because the market overall remains broadly soft, insurers are trying to combat severe weather claims through other means. One approach has been to bolster claims handling capacity.

Zurich in the UK, for example, has developed a “claims surge plan” over the past three years. UK property claims director Jon Cawley says: “As soon as a major weather event happens, we have extra employees manning the phones. They may not work in claims normally, but we have trained them for dealing with peak periods.” Cawley says that a mark of the success of the new system is that between 40% and 50% of claims arising from the January storms have already been settled.

PwC’s Khan applauds insurers for now commonly offering timely support for customers facing severe weather. “Many insurers will now know when a flood is likely and, before the event, issue advice to policyholders to defend their homes with sandbags and take valuables upstairs and so on.” Insurers have also recognised that, in the case of a freeze event, most damage to property is done during the thawing. So they are increasingly issuing advice on how to prevent problems such as pipes bursting or water leaking, for example by opening the trap door to the loft during the freeze period.

Increasing sophistication

Encouragingly, Khan says the pricing of weather-related risks has become more sophisticated. Insurers have invested significant time and money so as to better understand severe weather-related risks in the UK.

Aviva, for example, which frequently sets industry precedents, has developed its own sophisticated flood-mapping technology. Warsop says: “After the floods of 2000 we flew a plane over the country to measure ground heights using radar.” This was accurate to within about one metre but the data has since been honed further using laser technology that is accurate to 5cm. The insurer has also mapped data on surface water flooding, after some storm drains proved to be inadequate in the past few years.
Aviva issues highly specific policies too. “We use post codes and even go down to the level of individual houses in some cases,” Warsop says.

Working on it

However, Warsop adds that Aviva is still working on the mapping of freeze events. He says: “The weather in northern Europe remains notoriously difficult to predict. We know that some areas of the UK are prone to high winds and colder weather, but the fact that this area comprises sea intermingled with land makes the weather system here relatively unpredictable.”

Climate change is another great unknown that insurers are grappling with. Ernst & Young partner Simon Burtwell says: “Insurers are looking at how the climate is changing and how the phasing of winter months impact is changing in the long term. Also, given we’re still in a soft market, insurers are reviewing their books against known recurrent weather risks.” But this research and review period is far from complete and, in the meantime, weather will remain a tough risk to price. With the market remaining soft, there is no doubt that insurers are vulnerable to prolonged bouts of severe weather.

Q&A: Malcolm Tarling, ABI

The ABI is leading industry calls for change in the way buildings in risk areas are built and it wants a regular review of planning regulations - not just over construction on flood plains, but where there is any risk to property

Q: How effective are techniques to combat the damaging effects of extreme weather in the UK?
A: We want to see more flood-resistant building materials and adaptations such as the repositioning of electrical sockets higher up walls and the use of kitchen equipment on legs above the likely waterline. We are seeing increased take-up but more is needed - especially because flooding is expected to become more frequent. In addition, the decreasing amount of suitable land available for development means we have no choice but to build in flood risk areas.

Q: Is new legislation needed?
A: We would like to see the building regulations reviewed continually to take into account any factors - not just floods - that put properties at risk, and we are talking to government about that. There is good government guidance on planning, though, including Planning Policy Statement 25, which sets out a rigorous approval process for development on floodplains.

Q: How well are insurers tackling extreme weather claims?
A: Insurers have further improved their response when incidents occur and they continually look to use the most accurate risk assessment techniques to ensure premiums as far as possible reflect the actual risks and premiums do reflect the risks at present. Again, the main focus is on flood risk, and some insurers, in addition to using their own claims experience and Environment Agency data, have invested in comprehensive digital mapping systems to further identify high flood-risk areas.

Q: How is the UK looking in terms of claims this winter?
A: The winter is not over yet, so we do not have a complete picture. So far we have not had a major bad weather incident, albeit there was some heavy snow in Scotland early in the year. But this was nothing we would not normally expect - and set premiums to reflect - during the winter. Last year we had some exceptionally cold weather causing problems with burst pipe claims, which, so far, we have not seen a repeat of.

Malcolm Tarling is chief media officer of the ABI