by Indira Aditia and Fiona Silke
With the bushfires blazing in the Blue Mountains, insurance costs are becoming a hot issue. One report in the Newcastle Herald estimated the total cost of damage at $138 million. Insurance is an important risk management measure for households and businesses. The availability and cost of insurance are being affected by the recent events like the Queensland floods and Victorian bushfires, which are linked to climate change.
Recently, as part of our work with Net Balance Foundation, we reviewed the public disclosures on climate risk and adaptation actions of ASX100 companies. The first sector we reviewed was the financial services industry, including banking and insurance. This sector interests us the most because it has a large role in providing incentives and strategic funding for climate risk management and adaptation measures. The insurance industry in particular, as a risk transfer mechanism for the private sector, provides price signals for risk, which can influence people’s decisions on where to buy property and where organisations should invest.
What, then, do insurance companies have to say about climate risk and how are they managing it?
Our review has found that, due to their focus on risk management, most insurance companies talk and report about climate risk and adaptation strategies differently from the banks. Both Insurance Australia Group (IAG) and Suncorp Group’s annual reports highlight a concern that climate change may affect how insurance is provided and lead to higher premiums, consequently reducing the availability of insurance for some types of hazards. Suncorp has also taken a firm stance on the need for risk reduction to support insurance affordability and the sustainability of the industry. In an action that was broadly publicised, Suncorp stopped issuing new policies in Roma and Emerald for a while based on the company’s concern that, despite repeated severe flood damage, flood mitigation was not being addressed as a priority. Insurance premiums in parts of flood-prone Queensland have risen from $700 per annum to $3,000 as flood insurance became a standard inclusion in all policies (Fanning, 2012). IAG stated in their 2011–12 annual report that it is actively developing initiatives to improve the resilience to business interruption of small-to-medium-sized enterprises and enhance their flood preparedness.
QBE Insurance Group has also affirmed that the rising losses from extreme weather events pose a significant challenge. Recent events have resulted in increased claim costs, and the potential of underestimating the impact of catastrophic events related to changes in weather patterns has become a substantial risk to the business. \
Besides increasing premiums, insurance companies are also actively engaging with policy-makers on adaptation. For example, Suncorp has led the conversation about the importance of mitigation with local mayors as well as key state and federal government representatives. IAG has formed the Australian Business Roundtable on Disaster Resilience and Safer Communities and continues to participate in major government-led inquiries and reviews. They believe that a consistent approach to understanding and responding to risk at a government level will provide the foundations that will enable greater industry action and motivate the community.
And this is probably correct. According to Munich Re (2012), Australia’s weather-related insurance losses have increased fourfold over the past three decades. Coming back to bushfire-related insurance claims, in 2009, media have reported claims of approximately $1 billion for the Kinglake/Kilmore fires (Regnan, 2013). This is not to mention the deaths that resulted from this year’s, and previous years’ fires. The risks are becoming more prevalent in Australia, and the way in which our governments and our insurance companies respond will greatly influence how our households and businesses respond. We need to know more from our insurance companies, so maybe we need to advocate for more public disclosures.
Our study will turn next to the property and industrial sectors, as it is clear to me that for business to be successful in the future they must take climate risks into account today and develop adaptive strategies and actions to manage the associated uncertainties of tomorrow.
Indira Aditia has been an Intern at Net Balance Foundation (email@example.com).
Fiona Silke is an Associate of Net Balance (firstname.lastname@example.org),
one of the world’s leading sustainability advisory firms.
Fiona is based in Melbourne.
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