Insurers under extreme weather pressure

Whilst it is not clear exactly how the current weather events in Europe are related to climate change, both the devastating floods in the UK and the heatwave affecting Central Europe show how vulnerable we are to extreme weather conditions.

Vicki Bakhshi, Associate Director at F&C's Governance and Sustainable Investment team, said: "We can't say whether the events of the past few weeks are related to climate change, as climate varies year to year. However, they certainly give us an early indication of the type of extreme weather we are increasingly likely to get in the future."

The latest report by the Intergovernmental Panel on Climate Change highlights that climate change does not only translate into hotter, drier weather but also into heavy rain. A warmer atmosphere holds more moisture which means if the raincomes, it is likely to be more intense. In the case of Europe, this heavier rainfall will potentially be interspersed with longer periods of dry weather and more summers affected by drought.

"Risks are higher as carbon emissions increase so extreme weather events make people more aware of the need to fight climate change," Bakhshi said. "We can now see how expensive extreme weather can be. Obviously governments need to act but private sector insurance companies have to do everything they can too – they are really in the front line."

Extreme weather is costing insurance companies billions and it is crucial they take climate change into account in their business models and that they price the changing risks accurately.

"They need to make sure they are getting involved in all the risk reduction activities they can. They should work with customers to help them reduce their future vulnerability, and also advise governments on how to improve flood defences where these have proved deficient," said Bakhshi.

F&C has been talking about these issues with insurers and will release a report in the autumn looking at how the insurance sector is responding to the climate change challenge. The report will also give recommendations on how the industry can protect itself against future risks.

"The worse climate change gets, the more difficult it will be to cope with the growing risks which brings you back to the urgent need to cut emissions," added Bakhshi.