PBF cover in action

With memories of last disaster season still vivid, the need for risk mitigation is at the forefront as more summers of bushfires, storms and cyclones loom.


A collective effort is needed to prepare for disaster seasons 


Last disaster season (November-April), the Insurance Council of Australia (ICA) declared six natural catastrophes. Collectively, the bushfires, hailstorms, floods and storms were responsible for more than 295,000 insurance claims with an insured loss valued at around $5.4 billion. The “Black Summer” bushfires, which resulted in 34 fatalities and an estimated 18.6 million hectares of burnt land between September 2019 and March 2020, was one of the top five disasters in terms of insurance claims in Australia’s history (in excess of $2.4bn from almost 40,000 claims).


The bushfire catastrophe sparked a Royal Commission into National Natural Disaster Arrangements (due to hand down its findings later this year, with the interim report released 1 September). With the aim of developing “practical action” to address future disaster seasons, the Royal Commission has heard from climate experts, representatives of government and the insurance industry.


The impact of natural disasters on insurance cover


On average, natural disasters cost the Australian economy $18.2 billion every year, with that amount predicted to increase to $39 billion by 2050. The insurance industry has warned of more severe weather events due to changing weather patterns. While the bushfire season has extended by almost four months since the 1950s, the risk of more intense tropical cyclones in the north and severe hailstorms in the south of the country is also increasing. With the increased risks, insurance cover is being impacted.


Insurance premiums for policyholders are increasing as the losses sustained by insurance companies in responding to the natural disasters continues to rise. Australia’s property and casualty (P&C) insurers sustained a loss in net profit of $997 million in the March 2020 quarter off the back of the summer’s natural catastrophes and COVID-19.


These natural catastrophes have contributed to the current hard insurance market Australia is experiencing. “A hard market, in basic terms, means higher insurance premiums, less competition amongst insurance providers, reduced capacity from those insurers that are offering the cover and more stringent underwriting criteria,” explained Ryan Cameron, EBM Director – Broking.


For those in disaster-prone areas, the risk of being classified as a “red zone” increases as the impact of climate change becomes more prominent. A red zone is where an insurer deems a property, and its location, uninsurable due to its history of threats – either by denying cover altogether or by raising annual premiums above 1% of the property’s value, which would be $10,000 a year for a $1 million home. 


Modelling by Climate Risk in 2019 revealed the number of “uninsurable” addresses in Australia is projected to double by the turn of the century to nearly 720,000 – or one in 20 – if nothing is done to address escalating risk from extreme weather and climate change. The analysis, which calculates how changing climate risks (such as bushfire, flood, subsidence, inundation and extreme wind) would impact the cost and availability of insurance up to the year 2100 if all such risks were insured, also found thousands more would see their insurance premiums double or even triple.


What steps can be taken?


The ICA and other insurance experts have stated the Australian insurance market is no stranger to catastrophe events, given that Australia is exposed to a wide range of natural perils, including flood, hail, cyclone and earthquake, and it is unlikely that widespread areas would be “uninsurable”. However, most do concur that climate change will not only continue to affect thousands of Australians, its impact will only rise over the coming years without further measures – both in the insurance space and the wider national sphere.


Risk Mitigation


Risk mitigation needs to be addressed across the board – from all levels of government, all sectors and industries, insurers and individuals. This position has been echoed by the Royal Commission in its interim report, stating high levels of cooperation across state and federal authorities – and businesses, communities and individuals – are needed.


If climate perils are going to change in frequency and severity, insurers will need a better understanding of the risks so they can determine coverage and premiums. Research is critical to understanding the risk that Australian communities face.


“Mitigation is the cornerstone of efficient disaster management. With the cost of extreme weather getting higher and higher, the cost of insurance is also increasing and, as we have seen, becoming unaffordable for many people in high risk areas”, stated the National Insurance Brokers’ Association (NIBA), while welcoming the Australian Government’s announcement of $88.1 million in funding to establish a world-class natural disaster research centre. The ICA also welcomed the project, stating: “Australians realise the importance of natural disaster research, as it is the research findings that arm our emergency services, planners, builders, developers and communities with the information they need to continue to improve resilience, response and recovery to future natural disasters.”


The Actuaries Institute of Australia told the Royal Commission that there is a crucial need to improve the collection of weather-related data to better understand the impact of future extreme weather patterns. The Investor Group on Climate Change (ICGG) also called for the establishment of a National Climate Services Capability to better coordinate the provision of climate data between the Bureau of Meteorology, CSIRO, academia and other private and public sector actors. IGCC is working with representatives from business, insurance, academia and standards bodies under the Climate Measurement Standards Initiative to develop consistent standards for measuring and disclosing physical climate risk.


Beyond understanding the climate change risks, managing insurance and losses is influenced by a number of factors. Among these is looking at where the population resides and how buildings can be made more resilient through construction standards. 


The insurance industry is of the view that there is a need for a holistic pre-emptive approach to natural disaster management to reduce the risks to communities exposed to natural disasters. Both the ICA and NIBA have noted that this can be best achieved through investments by governments in physical mitigation and resilience programs, better land use planning and stronger building codes, along with the removal of unfair taxes on insurance.


In their submission to the Royal Commission, the ICA and the ICGG said government measures should include both better building standards and development processes, as well as measures to promote public and private investment in resilience projects. By identifying communities where mitigation projects could lower natural disaster exposures, it could lead to better insurance outcomes.


It is also important that individuals and businesses in disaster affected zones adequately insure their buildings and contents. Following the Black Summer bushfires, the ICA estimates 20-40% of affected residents were underinsured, while government figures showed 27% of homes lost were not insured at all.


Businesses also need to look at risk mitigation, both through adequate insurance and by proactively addressing vulnerabilities to help reduce potential damage and the business interruption which results.


As the risks to property and business increase in line with severe weather, a collective response to risk mitigation is needed to ensure the community and its assets can be protected. Talk to your EBM Account Manager about disaster season risk mitigation strategies for your home or business and follow our insurance tips here.


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