by Bernard Kellerman, Broker Buzz, Insurance Risk & Professional, September 3, 2014
All but one of the 20 largest property losses in the country in the past four decades have been weather-related and even though it accounts for just 2% of the global reinsurance market, Australia accounted for 6% of all losses in the five years to 2013.
There is near-universal consensus in the scientific community that climate change will cause more unpredictable and more extreme weather in the coming decades and that the process has already begun.
In Australia, that means more intense storms and storm surges, rising sea levels, wetter and drier extremes and increased flooding.
Insurance policies are typically issued on an annual basis but that hasn’t stopped insurers thinking long and hard about its impact and what role they can play.
In fact, Lloyd’s of London Head of Asia Pacific Kent Chaplin says: “The insurance industry sits at the forefront in helping to mitigate the impact of extreme weather.”
“Communities across Asia Pacific are highly exposed to these risks and catastrophe modelling firms and insurers need to account for surface sea level and air temperature rises in their modelling so we can better understand and prepare for their impact.
"Insurers can also help to strengthen defences against climate change by sharing our knowledge and expertise with the public sector to encourage climate change mitigation and adaptation strategies across the most vulnerable regions.”
Raising the stakes even higher is the fact demographic change keeps increasing the insurance sector’s exposure to adverse weather events, as explained by Allianz Australia Corporate Affairs General Manager Nicholas Scofield.
“The sea-changers and tree-changers have moved more property and assets into coastal areas and northern areas – for example, North Queensland – over recent decades,” he says.
“So, even if there was no change in the frequency of weather events, because we have more property exposed and the value of that property has gone up, any insurance claims will necessarily be higher than for similar events last century.”
Counting the cost
A recent report, compiled by Australia’s Climate Institute in association with consumer watchdog Choice, predicted that by 2050 the average home insurance premium could have almost doubled.
“There are a number of information barriers [to assessing true climate change effects on house prices] and we are saying that insurance premiums look like the canaries in the climate risk coal mine,” Climate Institute CEO John Connor says.
“It won’t be the same victims of natural disasters every time if the risk of extreme weather events and bushfires intensifies. That’s where the insurance sector has to make sure it’s in step with expectations.”
He says the problem is more of a property market failure than an insurance sector failure.
Further, some local governments continue to be reluctant to share detailed flood maps and other information that will allow more accurate risk assessment.
“Brokers, and the insurance industry generally, are the meat in the sandwich,” he says.
“The insurance companies, when they price premiums, are acting rationally.”
Pinpointed premiums
As average premiums increase, more granular risk data will become increasingly important as underwriters seek to sort out good risks from bad.
For instance, last year the Queensland Government announced it would share all its flood data with the industry, adding detail to many insurers’ already-sophisticated models.
Peter Jones, Zurich’s head of SME Underwriting, says flood cover can be offered sustainably for 95% of its business insurance policies, thanks to sophisticated flood data that has allowed his team to price risk accurately.
“That sounds great until you consider that less than 10% of properties have a flood risk and a large proportion of the 10% who don’t have flood cover are the ones most at risk of flood damage,” he says.
This, Allianz’s Nicholas Scofield suggests, is because severe flood risk can result in premiums that are five, 10 or 15 times the amount of premiums for similar houses that are not at risk.
After racking up $150 milliom in payouts for $4 million in premiums, Suncorp declared that homes and businesses in several central Queensland towns would not be offered in insurance.
“Our experience is that the vast majority of people most at risk will opt out of cover if they can," he says.
“This means brokers have a product that they can sell to someone with a high flood risk, but can’t afford to cover themselves for flood."
The downside of this is divergence in premiums, even for houses in adjacent streets, will become more common.
For example, in cyclone-prone areas, property premiums are influenced by the year of construction.
The dividing line for Allianz is 1982, when improved cyclone-proof building standards were introduced.
Now other factors are coming into play.
“The work on assessing flood risk means we are also able to look at whether properties are on flat land and close to the coast and determine if there is a storm surge risk when a cyclone hits,” Scofield says.
“Similarly, wind speeds increase as they move up the side of a hill increasing potential property damage.”
The majority of people in areas of low or medium to high risk will benefit most from the availability of more detailed data about flood risk for individual properties, as this gives insures more certainty in pricing, according to Colin Fagen, QBE Australia CEO.
However, there is more to be done by the industry as a whole, he suggests.
“With Australia’s exposure to natural perils, we need to focus more collaboratively on the preventative measures so we are reducing risk, particularly in relation to land development, risk awareness and mitigation initiatives.”
Karl Sullivan, the Insurance Council of Australia’s Policy Risk and Disaster Planning General Manager says, for instance, the industry is moving toward more precise assessment of bushfire risk at an address level, with better data on vegetation and landforms becoming more accessible.
This means of course that even before the climate noticeably dries out in some areas, as climate modelling has suggested, people in houses assessed as being highly vulnerable to bushfires are likely to see big loadings to their policies, much as people with flood-affected addressees have experienced, he warns.
“When it comes to address level rating for bushfire risk and premiums can be expected to diverge in much the same way as we have seen with flood cover,” Sullivan says.
The price to pay
Insurance affordability and boosting risk mitigation are two areas where the industry has been pushing hard.
“The argument shouldn’t really be about how insurers should lower their prices for people in high risk locations paying high premiums,” Sullivan says.
We need to focus more collaboratively on the preventative measures so we are reducing risk.
“It should be about listening to the price signal and working out how we can lower the probability of flooding for those people.”
One area where affordability can be increased is through tax reductions, not a popular topic in the current political environment, but one insurance industry leaders are keen to keep on the agenda.
“Numerous reviews, including the recent Henry Tax Review, have unanimously found that state taxes, duties and levies on insurance are inefficient to the point of being counterproductive,” QBE Australia CEO Colin Fagen says.
“Given the importance of insurance affordability and the implications of non- or under-insurance on the public purse, we believe it is time to act to remove all these specific imposts on insurance, as has previously been recommended.”
Insurance taxes are particularly regressive when one considers they are most keenly felt by those facing the largest risks, and therefore in most need of insurance.
When combined with the GST, taxes add around 20% to cost of premiums in many states, heightening unaffordability and lessening insurance’s reach where it is most needed.
However, an encouraging example is being set by the current ACT Government, which has been gaining industry praise for its progressive lowering of stamp duties on both life and general insurance products, with all such taxes to be abolished by 2016.
Leadership in promoting mitigation
Tax-free or not, insurance pricing plays a critical role in signalling to individuals, communities and government the existence and nature of specific risks.
Pricing should also encourage risk mitigation – either pushing developers to build to standards that will reduce the damage of a major weather event, or can amount to halting development in inappropriate areas, Fagen says.
NIBA CEO Dallas Booth agrees, and has been lobbying the Federal Government to grant the Council of Australian Governments greater powers to co-ordinate disaster mitigation planning on a national level.
The ICA’s Karl Sullivan says governments can drastically improve the built environment’s resistance to extreme weather in three ways.
“The first is land use planning; buildings need to be appropriate for their locations,” he says.
“The second side is building codes – they need to be updated to account for specific hazards, not just safety of life.
"You might get an incidental property protection benefit in a bushfire if the home is built to be “fireproof” for safety, but for most other hazards it’s just not taken into consideration.
"The third side is mitigation, to get the residual risk to property down to an acceptable level, by allowing actions such as clearing trees and undergrowth within a certain distance of homes."
Another industry leader, Suncorp Personal Insurance CEO Mark Milliner, has advocated strongly for more proactive government investment in mitigation infrastructure and changes to planning and building approval.
“Many communities in Queensland and Australia-wide could be better protected – and pay lower premiums – with the right funding and government policies,” he says.
And in the most unambiguous example of direct action, two years ago, after racking up $150 million in payouts for $4 million in premiums, Suncorp declared that homes and businesses in several central Queensland towns – notably Roma and Emerald – would not be offered insurance “unless clear decisions are made to build or implement improved mitigation to protect the residents of these towns.”
The move had the desired effect and so, once mitigation work began in Roma in September last year – 16 months after Suncorp pulled out – Milliner was there to announce the insurer would return to the town, but would be carefully reassessing risks until the levee was completed.
He suggested that premiums could fall by an average of 30%, and maybe by as much as 80%.
Broking through
While Australia’s insurance industry has been able to influence government policy and large-scale customer behaviour, through both lobbying and direct market actions, there is a well-defined role for individual insurance brokers in dealing with the consequences of adverse weather events.
“Brokers are in a unique position to educate their clients about dependencies they may have on suppliers to their business and the impact that could have to their business,” says Tony MacRae, Executive General Manager of Intermediary Distribution at QBE Australia.
That means explaining the value of business interruption insurance, particularly for small and medium-sized businesses, who quite often have greater dependencies upon their suppliers.
This increases the risk to their business in the event of a natural disaster.
MacRae also suggests advisers encourage their clients to develop a thorough contingency plan, including identifying alternative premises, alternative suppliers and alternative distribution channels.
There are also a range of other measures businesses of all sizes can take to protect themselves from increasingly volatile weather, such as ensuring buildings are designed to withstand the impacts of adverse weather, he added.
Insurance taxes are particularly regressive when one considers they are most keenly felt by those facing the largest risks, and therefore in most need of insurance.
In its latest report, the Intergovernmental Panel on Climate Change singles insurance out for a leadership role in preparing communities for climate change.
“Insurance can contribute positively to risk reduction by providing incentives to policy holders to reduce their risk profile,” the report states.
“Apart from constituting an autonomous private sector response to extreme events, insurance can also be framed as a form of social policy to manage climate risks, similar to New Zealand’s government insurance scheme; government measures to reduce or avoid risks also interact with insurance companies’ willingness to provide cover.
“Yet insurance can also act as a constraint on adaptation, if those living in climate-risk prone localities pay discounted or cross-subsidised premiums or policies fail to encourage betterment after damaging events by requiring replacement of ‘like for like’, constituting a missed opportunity for risk reduction.
“The effectiveness of insurance thus depends on the extent to which it is linked to a broader national resilience approach to disaster mitigation and response.”
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