Will Summer ’16 bring a surge of subsidence claims?

deckchair squareThere was a lot of speculation by the press after Easter that Summer 2016 would be the hottest for 40 years.  Several statements were made by long range weather forecasting companies in the press that the UK would be headed for a long, dry and hot Summer. In contrast, the long range forecasting model from our data partner Weathernet indicated this Summer to be mild but much wetter than average. Given the extremely wet start to June, Weathernet appear to be right and a surge in Subsidence claims seems unlikely at the moment.

We haven’t had a surge in Subsidence claims for over a decade and these have been more frequent in earlier decades. What should insurers expect when we do get the right conditions for a surge in subsidence claims?

The British Geological Survey (BGS) estimates that 1 in 5 homes (or 6.5 million) in the UK are at risk of subsidence.  Houses built on clay soil are particularly susceptible due to the clay soil shrinking during periods of drought.   It is estimated that around 70% of subsidence claims are as a result of clay shrinkage. Other external causes of subsidence are low rainfall, influence of trees and other vegetation next to properties, leaking drains and erosion due to flooding.

drought smallThe ABI statistics show that UK property insurers receive around 35,000 domestic subsidence claims in a normal year, at a cost to insurers of around £250 million.   With an average subsidence claim having a value of £15,000, insurers need to gain a deeper understanding into the potential risks of subsidence claims.

What can the industry expect in an event year?  The dry summer of 1989 resulted in the number of claims reaching 60,000 for the period 1990-1991.   At this peak, subsidence claims surpassed over £1.1 billion in today’s money for one year. Subsequent hot, dry summers of 2003 and 2006 also led to an increase in subsidence claims and large costs to the industry; with 54,100 claims in 2003 costing an estimated £400 million and 48,000 claims in 2006 estimated to have cost around £301 million.

The construction industry and loss adjusting industry have been become much more efficient at managing claims and carrying out remedial action cost effectively, so the average subsidence claim size has dropped in real terms. However, the same volatile cycle in terms of the number of claims related to weather keeps recurring and when we have had a dry summer this has resulted in a spike in claims compared to the previous year.

Whilst we haven’t experienced an event as extreme in terms of number of claims since 1990-1991, climate change may make claims volumes in the future much more volatile. It is this volatility that can take an insurer by surprise and hit the book hard, turning a promising set of numbers into a poor result for the year.

Legislation relating to solvency requirements and pressure to prove capital adequacy has prompted many insurers to make increased use of mapping technology and external data models to understand their exposure to a ‘worst case’ scenario.  This type of analysis involves an insurer comparing the vulnerability profile of its book of business and its geographic concentration in the context of a ‘worst case’ scenario. The problem is ‘what is a worst case scenario?’

This question is difficult to answer and would be slightly different for each insurer as it would need to be answered in the context of the property profile of each insurer’s book as this would have a marked effect on the degree of vulnerability to subsidence risk. Property vulnerability and understanding which policies are prone to making a claim is a large part of the overall risk profile. For example, it is worth making the point that areas of modern housing are much less likely to be affected. Also areas of older housing that have been hit in the past will have had the most vulnerable properties strengthened via partial or full underpinning. New properties are built to different standards with deeper foundations than certain older properties and so in general have lower vulnerability. Property type is also important, for example, single storey dwellings or Bungalows are lighter structures and so in general these are more vulnerable to damage through smaller amounts of ground movement than say a 2-storey or heavier structure.

Business Insight use detailed property data together with vegetation and tree data, geology, long term climate data and claims to model the level of subsidence risk for insurers. ‘Drought Insight©’ is licenced by a large number of household insurers and is recognised as the market leader in providing insurers with a deeper understanding of exposure to drought related subsidence claims.

For more information about managing subsidence risk, contact us on 01926 421408.