Canadian Underwriter

What Europe’s record heat means for insurers

July 22, 2022   by Philip Porado

Blazing summer sun during a heat wave

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Insurers covering businesses that depend on goods or industrial inputs from Europe should keep an eye on potential loss scenarios emerging from the continent’s crippling heat wave.

“High temperatures harmed tarmacs of motorways in Great Britain and Germany in the last years,” said Thomas Berning, a senior risk consultant at Allianz Global Corporate & Specialty (AGCS) in Munich. “Same to old motorways made of concrete in Germany. Motorways had, and have been, closed or velocity has been, or had been, restricted.”

In past years, excessive heat has also warped rails in the U.K. and Germany, Berning added, “and U.K. has been closing rails for transport due that risk right now.”

For European office workers and commuters, the heatwave is making a bad situation – due to COVID-19 and supply shortfalls from the Ukraine war – worse. Lack of air conditioning on subways and other rail systems is also taking a toll.

“Electricity consumption is going through the roof. There is a short supply of natural gas [which powers a lot of electrical generation] coming through from Russia and the EU is talking about rationing supplies,” said Gary Hirst, president and CEO of CHES Special Risk. “Russia is trying to weaponize natural gas…so there is a question as to whether they go back to coal fired [but] that causes issues with temperatures soaring. It’s a bit of a vicious circle.”

Hirst noted working conditions rules for U.K. office workers establish minimum safe temperatures, but there is no maximum. So, the emerging heat situation may cause shifts to employment law in the U.K and much of Europe.

“Lack of air cooling in offices or buildings may cause bodily injuries, delayed services, failure of service and supply outages,” said Berning. “It may harm production and products.”

In Spain, the Carlos III Health Institute reported rising incidents of heat stroke.

“Recently a worker of the urban services subcontractor in Madrid died by a heat stroke,” said José Luis Pallarés, risk consultant, liability in AGCS’s Madrid office. “After that, an agreement between council’s subcontractors and unions has been signed to restrict work in afternoons while the wave heat persists.

“The most plausible scenario are claims related with employers’ liability [for] heat strokes of workers, very specially for construction and urban services.”

For business interruption claims, the issue will be whether an extension under a client’s policy covers an act of God or force majeure, said Hirst. He noted COVID-19 meant a lot of businesses had to close by government direction, and that some resulting claims were entertained while others were not.

“It could be an electrical breakdown. It could be the transformers at your local switch yard get overheated and shut down,” he said. “A lot of insureds won’t pay the extra money for the cover.”

Likewise, some insurers only offer extra cover for a facility that’s two, or three kilometres from the insured premises.

“If the electrical switch yard is five kilometres away and it blows, then you wouldn’t have any cover,” Hirst said. “It largely depends on the brokers [and] whether the insured’s business wholly depends on some sort of power supply or some sort of material that’s been delivered to them.”

Unlike other parts of Europe, Pallarés noted Spain’s infrastructure is more heat resilient since it’s engineered for higher average summer temperatures.

“Therefore, we do not suffer melting tarmacs or warping rails,” he said. “However, there are liabilities derived from wildfires [including damage to power-distribution lines]. But also water scarcity, with farmers’ production reduced and ranchers slaughtering cattle [due to] scarcity of food and water.”

Prolonged high temperatures can also wreak havoc on both coal-fired and nuclear power plants that pull cooling water from rivers and lakes. Power plants are required to keep outlet water below set temperatures to protect biodiversity, Berning explained, which becomes difficult if intake water is already warm.

In some cases, that can lead to power plants having to cease energy production. What’s more, said Berning, in cases where that same water source is used to cool adjacent industrial facilities, like steel works or chemical plants, those facilities would have to close if the power plant can’t maintain those temperatures.

“This should be no risk for nuclear power using cooling water from the sea,” he added.


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