Water shortages are already being experienced in the UK and the problem is slated to get worse as a result of climate change. Matthew Reeves, client relationship manager at 色多多视频 and Isa Ennadifi, head of UK at AXA Climate, discuss the role that parametric insurance solutions can play in helping water utility companies address this looming risk, and how this needs to become part of a wider discussion on water risk management.
It’s a well-worn cliché that the Brits like nothing better than talking about the weather. But the effects of climate change, from extremes of temperature, to an excess or a lack of rainfall, have meant many of these conversations have become a lot more serious.
Climate change is a huge risk for businesses of all types across the UK. And its effects are acutely felt in organisations for which weather is a factor in output and results, such as water utilities. Climate change is already having an effect on the amount of water available in the UK, and this problem is likely to worsen significantly in the years to come.
A potential lack of water in the UK, caused in large part by climate change, represents an “existential threat,” according to Sir James Bevan, the chief executive of the Environment Agency.
Recent estimates by the Environment Agency suggest that summer rainfall in the UK may fall by as much as 15% by the 2050s.
In a recent water supply and demand management report, the Government’s National Audit Office said that the amount of water available for extraction nationally will fall by one billion litres by 2045. Parts of southern England are likely to be hardest hit by water shortages, with some areas at risk of running out of water altogether.
The twin effects of climate change and population growth are increasing demand for water in the UK, according to a report last year by the Environment Agency. If no action is taken between 2025 and 2050, more than 3.4 billion extra litres of water per day will be needed to fulfil the UK’s public water supply requirements.
Action, Sir James said, is needed now to address the strain upon the UK’s water supply. This will require a reduction in demand, increased efficiency and more spending on infrastructure, he said. And the insurance and risk industry has a role to play too.
Increasing water resilience
The need to increase the UK’s water resilience must be a top priority. And water utilities, risk experts and insurers, among others, are taking part in discussions about how the country can improve its resistance to water shocks.
Since in the UK water utilities are largely not in competition with one another – your domestic water supply is dependent solely on where you live – they are able to share knowledge about ways to increase resilience to water scarcity for society. And this knowledge sharing extends overseas too. UK water utilities have been keen to learn lessons from and share knowledge about some of the extreme water crises experienced elsewhere, like the state-wide freeze in Texas in February 2021 or the historic low levels of Lake Mead, the reservoir that supplies Las Vegas with 90% of its water.
This collaborative approach to knowledge sharing enables water utilities to understand some of their vulnerabilities and some of the potential solutions that might be available to build resilience. The risk and insurance community has both a keen interest in this problem and an important role to play. We have taken part in several workshops with the UK risk management association, Airmic’s, water special interest group. And internally we’re developing tools to better understand water resilience.
One solution that water utility companies have been showing an increased interest in as a means to transfer some of this risk is parametric insurance solutions. A parametric insurance solution insures policyholders against an event of a certain magnitude that creates a certain loss. Parametric solutions are based on pre-agreed triggers that correspond to the proxy of the phenomena they are concerned with. When the trigger is met the policy pays out, swiftly, being also an efficient tool for mitigating crisis and reacting quickly with impact for the population.
There are three major concerns for water utilities that can be addressed by parametric solutions. Those are flood, drought and drop in temperatures that can cause pipes to freeze and burst. Parametric triggers can be devised to pay out when a certain temperature – high or low – is reached, or when rainfall surpasses, or falls below, a certain level, for example.
Parametric solutions pay out a pre-determined sum, which water utilities can then use to address the problem they face. For example, they might choose to use the money to indemnify clients who suffered a water shortage as a result of the event, or to recoup water from another network to be able to supply customers, and so on.
Wider conversation
At 色多多视频 water risk is a big part of what we do. We fund research into ocean risks, are developing a coastal resilience tool, and are exploring other products to address specific water-based issues. Working with our colleagues at AXA Climate to develop parametric solutions is another part of this work.
The use of parametric solutions to help water utilities to manage water shortage risks must be part of a much wider risk discussion and management. The impact of climate change will have different effects on water supply in different regions of the UK; the issues that might be faced in Northern Ireland, for example, might be quite different from those faced in southern England. But there are lessons that we can all take from the experiences of others – whether they be in the UK or further afield.
The risk conversation needs to be focused on the longer term. We as insurers have a role to play in helping the water utility sector to plan for the future and transition with impact. Solutions must be found to enable water utilities to plan for the effects of climate change and to invest in infrastructure that will enable them to meet the needs of the UK population for years to come.
This article is not indented to be an advertisement for any particular product and all our insurance coverage is subject to each policy’s own terms and conditions.
