Weathering the storms

As summer has come to an end, we can look back on yet another year of unusual weather. Over the past months we have had the coldest February, the highest 24-hour rainfall ever in May, the warmest and wettest June, the hottest July, and the second wettest September on record.

If these drastic trends continue, there is no doubt that this is going to have an effect on insurance coverage; it could become unaffordable or, in a worst-case scenario, even unavailable.

Climatic changes have added a new element of risk to the insurance equation. Rising temperatures increase the amount of evaporation from the oceans, which tends to increase rainfall, causing flooding in areas prone to it.

In addition, higher temperatures add to the heat energy that fuels thunderstorms and hurricanes. A further advance in man-made climate change will almost invariably bring us increasingly extreme natural events and consequently increasingly large natural catastrophe losses.

Weather and climate are core business for the insurance industry. At its most basic, insurers transfer the risk of weather-related catastrophes by calculating, pricing and spreading the risk and subsequently settling resultant claims.

Insurers are able to provide financial support in circumstances where the peril is occasional, affects a limited proportion of the population at any one time, and where the cost can both be predicted and adequately covered by the premiums paid over a period. A changing, less predictable climate has the potential to reduce the capacity to calculate price and spread this risk.

The increasing numbers of extreme weather events are leading to rising insurance claims, with the implication that these become more frequent and more severe. However, it should be clarified that what is being discussed is not the scale of the actual weather event but, rather, the financial consequences of the claims made on the insurance industry.

A report commissioned by the Malta Insurance Association estimates that the insured homes in Malta suffered flooding damages during last September's storm, to a potential cost of Lm715,000. This accounts to close to 64 per cent of the total weather-related claims incurred for home policies during the entire of 2002.

The overall flood and lightning damage to homes and businesses for the storm of last September will cost insurers Lm5,270,000; Lm4.6 million of which are commercial policy claims. The latter amount is higher than the total amount of claims incurred under the same class of business for all of last year.

Property flooding is not the only problem that the insurance market has had to absorb as to this one has to add a further Lm630,000 incurred under motor insurance together with yacht and pleasure craft insurance claims that were weather-related.

These events prove that the loss for storm and tempest risk is much greater than many people believe, or indeed insurers themselves believed, owing in part to climate change, together with increased property development causing less natural drainage courses.

Freak circumstances could leave home owners' possessions floating, as well as cause structural damage to the previously sound property, and unfortunate home owners are left to clear the debris.

The clean-up operation is a prolonged and painful process, made infinitely worse for those who neglect to insure their homes and have to therefore carry the burden on their own.

Naturally an increase in the incidence and severity of weather-related claims is bound to have an effect on the cost of insuring against these perils.

Even under generally normal weather conditions, almost anyone can suffer serious damage from some combination of thunderstorms, floods, high winds and any other conditions. Since most of these problems usually only arise with any severity on an infrequent basis, many home owners do not appreciate the risk or else make the mistake of taking comfort in the false assumption that it is not going to happen to them. They have to ask themselves, is that really the case?

It is therefore a good time for policyholders to take stock of their current insurance coverage to ensure that their property is adequately covered against the ravages of weather-related perils in the months and years ahead.

Too often policyholders receive less from insurance policies than they expect due to their property not being insured for its full value, or they are not clear as to what type of damage is covered.

It is therefore strongly suggested that homeowners, renters and business owners review their policies and consult their insurance providers about their current coverage, particularly for natural disasters, including violent winds, storms and floods.

If the home insurance policy has the correct cover in place and is regularly updated, one is unlikely to find oneself at the mercy of the weather and with a financial crisis to contend with as well.

It is also vitally important to ensure that insured values are accurate and regularly updated so as to avoid problems in the event of a claim.

Those of you sitting snugly in your dry, uninsured homes, listening to the rain outside and watching on television the trials of unfortunate victims of the recent floods need to take heed. The scientific consensus is that natural disasters will continue to increase, both in severity and frequency.

Siobham Zammit is manager at the Malta Insurance Association.