Insurers blame climate change for rising costs

Businesses that may already be struggling to comprehend and comply with climate-related legislation will soon face another environmental burden – rising buildings insurance.

That is the conclusion of the latest quarterly study from the AA British Insurance Premium Index released this week. Although the survey only tracks home insurance providers, its findings are likely to be mirrored in the commercial sector, which is similarly prone to the increased incidence of flood and storm damage that the study identifies as the main driver behind rising prices.

The report reveals that the average quoted premium for an annual building insurance policy has risen for the sixth successive quarter. It now stands at £223.92, a 2.5 per cent rise over the past quarter and 10.1 per cent over the past year, according to the AA.

Simon Douglas, director of AA Insurance, said insurers are beginning to reflect concerns about climate change in their pricing. "The industry is expecting rising cost and frequency of claims for flooding, subsidence and storm damage," he said.

He added that it is not only high-risk areas which are facing increasing premiums due to the threat of flooding. "Compared to the first six months of 2008, there has been a 15 per cent rise in the number and cost of payments for buildings damaged by flash floods and storms in areas with little or no previous record of such claims," he explained.

Another factor in rising insurance premiums is the cost associated with making homes more environmentally sustainable, such as improved insulation. The report noted that if insulation is damaged by flooding, this puts additional costs on home owners and insurers when it comes to repairs.

"Meanwhile, tighter building regulations mean that structural repairs must meet modern standards for such things as electrical wiring and insulation," explained Douglas. "As a result, the cost of meeting a claim – particularly for older properties – has been rising steadily."

In March this year, the Association of British Insurers claimed that estimates of climate change-related damage are too low and need to be updated in line with recent scientific predictions that temperatures could rise by between four and six degrees by the end of the century.

Premiums for businesses and householders in areas that see increased risks of flooding as a result of climate change could more than double, according to Andrew Dlugo-lecki, a visiting research fellow at the University of East Anglia's Climatic Research Unit.

And in the US earlier this year, the National Association of Insurance Commissioners adopted new mandatory rules requiring US insurers to disclose to regulators the risks they face as a result of climate change.

Under the new rules, all insurance companies with annual premiums of more than $500m (£303m) will have to complete an annual Insurer Climate Risk Disclosure Survey and hand it to regulators. The deadline for the first reports will be 1 May 2010, with firms required to hand over the completed survey to regulators in the state where the insurance company is based.