An increase in adverse weather activity attributed to climate change is putting insurers under pressure to strengthen their supply chain.

Climate change is now considered to be a real and active phenomenon. The Climatic Research Unit at the University of East Anglia reports that in the last 100 years, the average temperature of our planet has increased by 0.80 C and global sea levels have risen by 20cm.

While this may not seem severe, the consequences are. The 2005 Atlantic hurricane season was the worst in recorded history and in the same year, Europe fell victim to its first tropical storm. Hurricane Vince formed 515 miles east of the Azores, much further north and east than is usual for hurricanes, and in waters colder than those previously thought necessary for the creation of a hurricane.

With the incidents of natural disasters increasing at an alarming rate, environmental experts are at long last having their global warming research taken seriously and those with the most to lose financially have realised they must react to this issue today, and not tomorrow.

The hurricane season started on 1 June and with it came a prediction from insurer-rating agency AM Best that major windstorms in the US could cause $100bn (£53.3bn) worth of property loss and wipe out 20 to 40 insurers. Not surprisingly, the insurance industry was quick to react with a report that climate change policy and research now tops its agenda.

Much attention is justifiably given to the global situation, but what about closer to home? In 2005, Northern Ireland and Scotland were affected by windstorms when wind speeds reached 124mph. How will climate change affect the UK claims landscape, how will UK insurers cope and what demands will be put on contractors in their supply chain?

In May this year, a leading direct insurer warned that two million London homes are at risk of subsidence if the winter drought is followed by a hot, dry summer.

The prognosis doesn't look good and already there is talk of another 'event' year. Insurance experts fear a repeat of 2003 when the long, hot summer left tens of thousands of homes needing repair. In that year, subsidence claims rose from 32,000 to 54,100 and costs doubled from £183m to £390m.

Historically, a subsidence surge has coincided with a recession in the construction industry. Therefore contractor capacity hasn't traditionally been an issue for insurers. In 2003 the subsidence surge hit at a time when the construction sector was reasonably buoyant but service levels were maintained. Would it be the same now?

The specialist contractor landscape has changed and if insurers are not careful, they could be left high and dry. The subsidence market is shrinking and contractors have moved away from insurance work into other areas.

Insurers' procurement models now favour national contractors above the regional specialists (although in the majority of cases they have to sub-contract to meet demand) so there are fewer suppliers being able to provide the required large-scale solutions.

With smaller contractors being squeezed out of the equation and greater emphasis on mitigation and superstructure repairs, there's less underpinning work to go round. Currently, some 5% of subsidence claims result in underpinning and those who do deliver this solution often fall victim to insurer payment delays.

The Association of Specialist Underpinning Contractors recently reported that over 50% of its members' invoices are sitting with the insurance industry for more than 60 to 90 days plus, despite being presented with a 30-day term.

In a bid to tackle the payment issues, the Subsidence Forum, formed in 2004 to "represent all those interested in, or affected by subsidence" has set up a working party on supply chains. Payment has been identified as a key area for attention. Chairman John Parvin comments: "Improving the payment process is a top priority for us and it is something that will be addressed."

Fewer contractors
Despite the assurances, underpinning contractors are turning to other sectors to secure a stable work flow. Over 25 years ago, the number of contractors working for insurers would have topped 50. Nowadays, it's less than 20. Not only are there fewer contractors, but less of their work is for insurers. Five to 10 years ago, over half of a contractors' turnover would have been insurance funded, in some cases now, it's less than 3%.

The demands of having to provide a nationally-based solution coupled with a shrinking market and sluggish payments have certainly taken their toll.

Rob Withers, managing director of subsidence repair specialists, the Withers Group, reflects: "We've all had to change our approach and look for differing solutions and innovative techniques. I've built up a national network of repair companies, Withersnet, with 24/7 access to supplier partners to meet the increasing coverage demands of insurers.

"Also we have developed an environmentally-friendly, low-cost void-forming technique, with-a-void, that reduces claims costs by a third and reduces the amount of material left in the ground."

But what are the implications if 2006 or 2007 is an event year? Withers continues: "If there were around 40,000-50,000 claims the industry would react as before and cope. But there's one big difference - the 5% of claims that result in underpinning would hit contractors in the 2007 to 2009 period, right in the middle of the Olympic Village construction."

As there are only a certain number of subsidence experts and resources would be severely tested during a surge period, in the future, insurers could be hard pressed to find enough contractors to 'deliver that insurance promise'.

It's boom time for the construction sector. An eye-watering £15bn has been allocated to the 2012 Olympic Village construction (more than has been spent in the entire history of subsidence claims), then there's post 2012, the Thames Gateway and public sector regeneration.

Will contractors really want to focus on subsidence claims when there are rich pickings elsewhere?

"It will be a dilemma," concedes Withers. "Contractors who have a strong relationship with their insurers will stay loyal, but there's no doubt skilled operatives will be in demand. They'll be sourced from the Midlands downwards, which could leave insurers without national cover."

If figures from the Construction Skills Network (CSN) are anything to go by, the insurance industry will be exposed. The 2006 CSN report reveals that the UK construction industry needs 87,000 new recruits every year until the end of the decade if it's to meet the anticipated surge in workload.

Effectively, this is 348,000 recruits by 2010. The biggest average annual requirement on site is going to be for wood trades (11,000), electricians (8,100) and managers (10,500). In a supply and demand culture, the cost of labour will rise. Insurers will therefore have to pay higher rates for services - something they must factor into their claims costs projections.

And it's not only labour costs. The Building Cost Information Service in its April 2006 briefing concludes that material costs had risen by 21% in the year to 2005, whilst nationally agreed wage rates rose to 5.4% in the same period. It predicts that material prices and wage settlements are likely to rise above the rate of inflation over the next year.

What if the next year is that 100-year 'event' and mitigation works carried out on over 95% of properties in previous years, fails? The percentage of underpinning claims in the 2007 to 2009 period would rise to 10% or beyond.

Insurers will face many re-opened cases, customer satisfaction levels will plummet and claims costs will soar. While this may appear pessimistic, this scenario needs to be considered. After all, aren't insurers experts in risk management and used to considering every eventuality?

Strong relationships
John Parvin responds: "We're hoping our contractors stay loyal. The majority of UK insurers are working to build and maintain strong relationships with contractors so claims volumes, if there is a subsidence surge or weather-related event, can be met. While we'd like to maintain a steady work-flow, the very nature of claims means they do 'peak and trough'."

Let's hope that climate change doesn't result in too many claims 'peaks'. Tony Boobier, subsidence expert and vice president of Marshall, Swift & Boeckh, has been urging the insurance industry to factor the impact of climate change, the construction boom and increased material/labour costs into its claims and underwriting projections.

He comments: "We need to have some joined-up thinking here. If a major claims surge and the construction boom causes a shortage of contractors and materials, it will affect rebuilding and repair costs. I believe there's emerging evidence of a power shift from insurers to suppliers and the industry needs to recognise and respond to it."

Withers concludes: "Service level agreements are all about customer service and initial response times. But this customer service may 'fly out the window' if contractors decline to work for insurers when they can secure better margins and payment terms in other areas of the construction industry." IT