Property and Environmental. BRICKS AND WATER The impact of Macroeconomic Trends on London Market Claims. UK & Ireland

Transcription

1 Property and Environmental BRICKS AND WATER The impact of Macroeconomic Trends on London Market Claims UK & Ireland

2 CONTENTS EXECUTIVE SUMMARY FLOODING ENVIRONMENTAL PROPERTY RISKS SUSCEPTIBLE TO FRAUD THE WAY WE LIVE NOW The impact of Macroeconomic Trends on London Market Claims Property and Environmental

3 EXECUTIVE SUMMARY Driven by global events and economic trends, the risk of property damage claims is growing exponentially. The flooding in Cumbria over the winter has made headline news, with recent figures from the Association of British Insurers suggesting that payouts would reach 1.3bn, but this only scratches the surface of potential claims and costs that could be accrued in the coming years. Against an economic backdrop of cautious optimism, changes can have dramatic consequences. Cuts to government budgets in flood defences have already turned out to be a costly decision, and with the focus firmly on reducing the budget deficit, further reductions could lead to a growth in property fraud claims, as struggling business owners look to avoid insolvency. Innovation, while the lifeblood of economic success, also poses problems for insurers. To alleviate concerns surrounding the reliance on non-renewable energy, the creation of new technologies has led to the emergence of new risks. Coupled with the growing levels of extreme weather conditions, design flaws could lead to expensive repair costs, setting back both the project and the insurer. As the UK continues to challenge the global economic powers, the demand for property is on the rise. However, due to a growing number of projects, largely concentrated in London and the South East, a skills gap is quickly emerging in the construction industry, and with it, additional risks to insurers. All of these factors have led us to a situation where over the last decade, the average cost of each individual claim has more than doubled. This should act as a warning to the insurance industry, which must look to stem the tide of claims to prevent significant profit checks in the coming years. Jennette Newman Partner and Head of Lloyd s and London market 01

4 1. FLOODING Worsening weather fuels 1.3bn of claims Government has 350m flood funding hole to fill from private sector Migration set to result in population rise of 10 million by 2040 Additional claims risk of five million people living on flood plains December 2015 saw record levels of rainfall, causing severe flooding in parts of Scotland and Northern England, with Cumbria in particular badly affected with thousands of people displaced from their homes. The Association of Drainage Authorities (ADA) confirmed the severity of the situation, reporting to the Government in November that the UK had experienced the five wettest years since This flooding has had a significant impact on insurance claims, with the Association of British Insurers estimating that damage caused by floods over the winter will reach 1.3bn. Further adding to this problem, between 2010 and 2013 the Environment Agency had its budget cut by 13%, which has had an impact on the amount it can spend on flood protection. While the Government has pledged to spend 2.3bn over the next six years on flood defences, this relies on it receiving 600m in external private contributions, of which only 250m has so far been secured. Recent events tell us that incidents of extreme wet weather are on the increase. Between April and July 2012 the UK experienced a period of exceptionally wet weather breaking previous rainfall records and resulting in several significant flood events. This was repeated less than six months later with another exceptional weather event in November that year. Increased flooding, coupled with cuts in Government funding, will challenge flood defences and will pose a significant risk for insurers. Though it perhaps is not the first thing to come to mind when considering flooding, migration is set to have an enormous impact on prospective damages. Net migration, along with births to foreign-born parents, has accounted for 85% of population growth in the UK since Official figures project that the population will rise by almost ten million over the next 25 years, with 68% of this increase down to future migrants and their children. An expanding population creates enormous pressure on an already strained housing market. Planning applications to build on flood plains have been increasing every year for the last five years, with over five million people now living or working in flood risk areas in England and Wales. This significantly increases the risk of flooding and subsequent claims. While Flood Re a new collaboration between the Government and the insurance industry will cap insurance premiums for those living in flood-prone areas, it will not alleviate the wider pressures on the housing and insurance markets. 02 The impact of Macroeconomic Trends on London Market Claims Property and Environmental

5 Claims from floods over the winter will reach 1.3bn 2.3bn GOVT SPEND 250m SECURED FIVE MILLION living in flood risk 10m population growth 03

6 2. ENVIRONMENT Investment in energy exceeding that of transport, water and communications combined Legislative targets and scrutiny driving both investment and claims Extreme weather conditions and unproven technologies leading to new risks in wind power US experience should act as a warning to UK in terms of fracking claims Investment in the renewable energy sector has grown exponentially, largely driven by new legislation and targets aimed at tackling climate change. The Renewable Energy Association estimates that 40bn has been invested in the sector since 2010 and a further 48bn investment will be required in order to meet the target of renewable energy accounting for15% of the total energy production by As such, since 2010, investment in energy infrastructure projects in the UK has exceeded that of transport, water and communications combined. Large environmental projects such as onshore wind, solar, energy from waste and biomass have established the UK as a world leader in renewable energy, something that has attracted significant investment from overseas, to such an extent that the UK is now widely viewed as an attractive safe haven for foreign investors. Wind power an emerging risk The UK is the sixth-largest producer of wind power globally and has been the world leader in offshore wind power generation since It is estimated that by 2020 wind power generated offshore will account for between 8% and 10% of the UK s annual electricity production. However, with weather conditions becoming increasingly extreme, new risks are emerging. Wind turbines are particularly sensitive to natural phenomena, including lightning and strong winds. Claims may also arise from design defects from new, unproven technologies, such as new blade designs or storage capacitors. In addition, there is the foreseeable risk of damage to undersea power transmission cables, which will give rise to expensive claims for repair. Fracking a growing industry Whereas fracking is a nascent concept in the UK, it is doubtless set to grow as an industry, driven by the need to explore new sources of energy in the context of the decline of oil production in the North Sea. In the US, litigation arising from fracking sites include nuisance claims for gas migration, seismic activity, pollution caused by chemical spillage and subsidence. Given the density of the UK population, such claims may be more frequent and group actions may be brought against operators of the sites and their insurers. The inevitable scrutiny of the Environment Agency could also lead to prosecutions brought against site operators over issues of waste disposal and the treatment of contaminated water. 04 The impact of Macroeconomic Trends on London Market Claims Property and Environmental

7 40bn INVESTED greater than transport, water and comms put together. EMERGING RISKS POLLUTION DESIGN FLAWS UNDERWATER CABLES WEATHER 05

8 3. PROPERTY RISKS SUSCEPTIBLE TO FRAUD Falling fraud figures not necessarily indicative of falling instances Phoenixed companies more likely to turn to insurance fraud Lack of detail from insolvency figures - cannot highlight at risk companies Whereas the present age of austerity could be perceived as creating an environment that is conducive to property fraud, the number of detected property frauds (both domestic and commercial) in 2014 was actually down 29% over the previous year s figure (according to figures published by the ABI). The value of these frauds at 108m was also down by 21% over the same period. This may seem to indicate that the strong deterrent message to potential cheats is hitting home. It would be unwise to read too much into these figures, however, when considering the SME market in particular. Convictions of owner/ directors for commercial insurance fraud are few and far between, and even then immediate custodial sentences are rare and are typically suspended. There is nothing to suggest that the deterrent message is ruffling the feathers of SME company directors who tread the line in other areas of business such as fiscal propriety, and as such insurers of commercial risks still need to be vigilant. A key area for consideration is insolvencies. Looking at the statistics, we see that over the last 20 years, rates of personal and commercial insolvencies have remained constant. Statistics from the Insolvency Service show that company insolvencies in England & Wales since Q have barely dipped below the 4,000 per quarter mark, with personal insolvencies consistently over 20,000 per quarter mark. Scotland and Northern Ireland present a similar picture. Some owners of companies that have been made insolvent will have resurrected the business as a new entity, by simply transferring the assets on to a newly-established company and dumping toxic debts typically money owed to HMRC. This practice is known as phoenixing. Insurers are reluctant to work with such businesses, but these risks are still being picked up on the market. The profile of individuals engaged in such deliberate practices time and again presents a clear fraud risk as another means of securing financing. Whilst the companies engaged in repeated phoenixing represent a fraction of new company start ups in the UK (585,700 in the 12 months to November 2015), there were still 63% as many company dissolutions in the same period (369,500) Dissolutions include failed ventures not reaching the stage of formal insolvency, but may still indicate a trend to deter underwriters. Importantly, what the statistics do not show are the number of businesses whose finances are teetering on the brink when proposing for insurance and are therefore the at risk ventures susceptible to fraud as an alternative to staving-off insolvency. With the Insurance Act 2015 now set to limit the scope for outright policy voidance, the best advice to insurers is to know their customers and avoid such risks in the first place and the decision to make records at Companies House available on-line and now free of charge is a welcome move that facilitates transparency. 06 The impact of Macroeconomic Trends on London Market Claims Property and Environmental

9 63% as many dissolutions as startups in 2015 RECORDED PROPERTY FRAUD DOWN BY 29% Start-ups 585,700? Companies 369,500 at risk Dissolutions 07

10 4. THE WAY WE LIVE NOW Though counterintuitive, the recession has bred a property boom, particularly in London Demand for new construction projects exposes skills gap Water escape damage a particular risk due to tower structure As a result, average claim costs have doubled in last ten years Although seemingly perverse, the economic recession has in fact led to a property boom, especially in London and the South East, as international investors have shunned risky financial markets in favour of one of the few investments that guarantees long-term security. International crises especially in the Middle East have also put pressure on the London housing market. A 2015 survey found that 263 towers (buildings over 20 storeys high) are in the pipeline across London, representing an increase by 11% over the previous year. Some 70 are under construction and 117 have been approved. In the residential sector also, there has been a 25% increase in planned activity in residential construction in London, with 25,000 units in the pipeline, representing a combined sales value of 60bn. The expansion in the property market has also had an impact on the labour skills market, as with a greater number of buildings projects being embarked upon, there is a growing demand for qualified builders. In line with this, Zurich, in its construction industry research for mid-sized contractors and house builders, recently said that skills shortages were expected to be the main issue affecting contractors over the next five years, with brick layers, carpenters and joiners being the most sought after artisans. A growing threat of skills shortages inevitably brings a rising number of claims, with the construction of multi-storey buildings in particular leading to water escape damage; the result of a combination of high water pressure in taller buildings and a dearth of skilled labour. ECIC, a specialist insurer for the construction industry, reported a marked increase in claims arising from the escape of water, causing extensive and expensive property damage. While the total number of individual claims across all damage types has decreased dramatically between 2004 and 2014 (almost half), the total value of claims has largely remained constant. As a result, the average value of claims rose from 1,144 to 2,298, highlighting the growing financial risk of each incident. In particular, weather-related claims rose from 986 per claim in 2004 to 2,303 in The impact of Macroeconomic Trends on London Market Claims Property and Environmental

11 11% increase of London skyline towers 25% increase in residential buildings (with a combined value of 60bn) claims rising from 2,298 1,144 to per claim 09

12 KEY CONTACTS Jennette Newman Partner and Head of Lloyd s and London market T E jennette.newman@blmlaw.com Catherine Hawkins Partner and Head of property damage T E catherine.hawkins@blmlaw.com Mark Aitken Partner T E mark.aitken@blmlaw.com John O Shea Partner and head of policy indemnity & coverage T E john.o shea@blmlaw.com Michael Salau Partner and head of construction & environmental T E michael.salau@blmlaw.com David Taylor Partner and Head of Scotland T E david.taylor@blmlaw.com STAY CONNECTED TO OUR COMMENTARY ON INDUSTRY LinkedIn.com/company/blm blmredblog.com blmpolicyblog.com ec3view.com The impact of Macroeconomic Trends on London Market Claims Property and Environmental