For a while now, insurance data has been sending a warning: natural disasters are on the rise. Not just in frequency, but also in scale.
The catastrophic Black Summer Bushfires during the 2019 and 2020 bushfire season cost insurers $2.32 billion. Hailstorms in early 2020 resulted in $1.68 billion in insurance claims, whilst another hailstorm on Halloween of 2020 generated $1.03 billion in insurance claims.
Each of these events however, pale in comparison to the damage caused by the flooding that hit Australia’s East Coast in February and March of this year. With $5 billion in insurance damages, it is already the second most expensive natural disaster in Australia – sitting just behind the 1999 Eastern Sydney Hailstorm which cost $5.57 billion (normalised to 2017 values) – all without taking into account the subsequent flooding that has happened since March.
Experts are predicting that with the impact of climate change those costs will only rise. In its once-a-decade Megatrend ‘Our World’ Report, the CSIRO predicts that “extreme weather events are set to exceed the bounds of historical norms”.
Forecasts by the Insurance Council of Australia suggest that by 2050 the annual cost of insurance payouts caused by extreme weather will reach $35.2 billion – three times the cost in 2017.
Attach the insurance costs to natural disasters and a clear trend emerges. Not only are natural disasters on the rise, the big ones – billion dollar natural disasters are also on the rise.
From 1970 to 2000 Australia experienced seven natural disasters where the insurance costs reached above a billion dollars. Since 2009 there have been 14 natural disasters where insurance costs have reached above a billion.
Chief executive of the Insurance Council of Australia Andrew Hall has said that the last decade has seen “an unprecedented 10 year run of extreme weather events”.
Insurance puts a price on risk. The risk of damage occurring to your property – whether the risk comes from fire, flooding, cyclones or storm damage. The greater the risk insurers believe a property is exposed to – for whatever reason – the higher the premium.
Calise Liu is one of the authors of the Home Insurance Affordability and Socioeconomic Equity in a Changing Climate. She said insurers might have to charge more.
“Insurers charge based on the risk which they will be taking on – and they should, because if they don’t charge enough then you cannot pay out when people need it.”
The report from the Actuaries Institute analysed the numbers on insurance affordability for Australians, and its conclusions were unambiguous: climate change is driving more extreme weather events.
More extreme weather events means higher insurance costs. Higher insurance costs will impact those already struggling to pay for insurance, with the report finding that “[the] impacts of climate change on the vulnerable population are far greater than the base population”.
We are already seeing this price increase. In August, one of Australia’s largest insurance conglomerates, Suncorp (which includes insurers AAMI, GIO and Apia) hiked its insurance premiums by an average of almost 10 percent, which is the largest increase since 2013. At the same time, Steve Johnston, Suncorp’s chief executive, predicts that the company will continue raising home insurance premiums by 15 percent over the next year as more extreme weather events arrive.
“It just confirmed what we already knew”, Liu said. “There is lots of concern that insurance affordability is a problem across the board. We can clearly see in the data that insurance costs have gone up over the last decade.”
Currently one million households are classed as ‘vulnerable’. That is, households which spend at least 7.4 weeks of their annual income on insurance costs. The number of vulnerable households experiencing extreme home insurance affordability pressure are concentrated in Australia’s north, including northern Queensland, northern NSW and the Northern Territory.
Some parts of the country are already feeling the impacts in stark terms. In Northern Australia, which is generally prone to more cyclones and flooding events, home and contents insurance was 1.8 times more expensive than in the south in 2020. According to data from the Australian Competition and Consumer Commission about 20 percent of households above the Tropic of Capricorn are foregoing insurance, exposing them to significant losses in the event of a loss causing event.
But, it is not just rural or coastal areas that are feeling the pressure of rising insurance costs. A fifth of homes in the City of Melbourne are already classed as being under extreme affordability pressure.
Nicki Hutley is a leading economist at Climate Council and she thinks Australians are not ready for the cost of insurance.
“It is clear that Australia is fast becoming an uninsurable nation.”
“Skyrocketing costs or flat out insurance ineligibility are becoming more and more widespread under climate change.”
Industry figures are calling for state and federal governments to take actions to minimise the impact on individual home and business owners by investing in resilience funding.
Resilience funding is where the government spends on infrastructure designed to withstand natural disasters, such as improving building codes in cyclone prone areas and lifting houses on stumps in low-lying areas. By improving the resilience of homes and communities, the risk of loss reduces. By dropping the risk profile, a drop in insurance premiums should follow.
A thornier question is what to do about established communities in high risk areas. Towns like Lismore were only just recovering from one disaster before the next one hit. Increasingly, those gaps in time between natural disasters are shrinking, giving residents less and less time to recover. But how feasible is it for those living in those vulnerable areas to continue living there? NSW Premier Dominic Perrottet acknowledged the need for authorities to consider how they are rebuilding communities that are being repeatedly impacted by flooding.
“You can’t keep doing the same things the same way and expect a different outcome”.
It is something Calise Liu warned to be something that needs to be at the forefront of people’s and government’s minds.
“People aren’t thinking about the risks of natural disasters when they are buying a property – or the impact it has on their insurance costs.”
in other words, it is often only after the property has been bought that purchasers realise what the insurance costs are. By then it is too late.
Lower rates of insurance inevitably touch the taxpayer. “When natural disasters happen then [the uninsured] cannot get the money they need to get back on their feet, and that means the government and the taxpayer will be the ones to pay,” Ms. Liu said.
From 2005 to 2022 the Federal Government spent $23.99 billion on natural disaster relief and $0.51 billion on natural disaster resilience. This year alone the Federal government has paid $514 million to 621,700 people affected by the flooding along Australia’s East coast through the government disaster assistance program. Over the last 12 months extreme weather events have cost every Australian household an average of $1,352 – a substantial increase on the $888 cost that households have been paying on average every year over the last decade.
For that reason the Insurance Council of Australia says that an investment in resilience spending of $2 billion over the next five years between state and federal governments is needed to mitigate rising insurance costs.
“It is clear that the community needs to be better protected,” according to the Insurance Council of Australia.
“The scale of the impact of the February-March 2022 floods and the increasing likelihood of further events make it imperative that the rebuild and reconstruction significantly improves the resilience of at-risk communities to future extreme weather events.”
Featured image: August 19 2012, Brisbane, Queensland, High Exposure, Creative Commons
