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Climate Related Insurance Inflation is Here and Not Going Away

Long term climate strategies deliver admirable targets but won’t do much in the near term, with insurance premiums rising amid devastating weather events across the country

“The single biggest driver of premium growth in Australia in the last 10 years has been environmental factors”.

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This comment leapt from a conversation I had recently with a long-time insurance expert from a consultancy based in Sydney. It’s not hard to see why; as someone that recently moved from the UK, a geography where rain was a lifestyle, my family and I have been dismayed at the biblical weather conditions we’ve witnessed.

Australia has grappled with devastating weather events over the past decade, which could once be called ‘one-in-100-year’ events. Now, as these instances become more regular, that comment loses significance in the face of what appears to be a ‘new normal’ of sorts. 

Data sourced from the Bureau of Meteorology (BOM) shows rainfall trends since 1980 has polarised between the Northwest and the southern parts of Australia. It reported 2020 as the fourth warmest year on record for Australia despite a La Nina event, and despite the national rainfall total that year a full four per cent above the 1961-1990 average. That year, parts of South Australia between the Flinders Ranges and Kati Thanda / Lake Eyre, much of northern and eastern Western Australia and much of the Northern Territory received above average or record rainfall, while most of NSW did receive above average rainfall, but in a period soon after the 2019 bushfires.

The climate has seemingly shifted already, and everything from the relentless flooding seen in Queensland and NSW this year to the devastating bushfires of 2019 and even pestilence are occurring more regularly and seemingly one after the other. The recent rat plague of regional NSW was caused by, among other things, ideal breeding conditions and a lush food supply of crops from a wetter-than-expected summer (following a period of severe drought).

The key to businesses and property owners during these times is general insurance – they want the security of knowing that if their property is damaged, they’re protected.

But as climate impacts rise, so too do the premiums.

Leveraging data sourced from the Australian Prudential Regulation Authority (APRA), there has been a steady growth in Gross Written Premiums since 2019; these are the revenues insurers take for their policies, and they’ve increased from $8.3 billion in 2019 to $10.4 billion last year. Now, if we compare this to a single environmental trend – in this instance, rainfall data sourced from the BOM – we see that rainfall data is tracking in line with these increases: rainfall has increasing from 102,000mm in 2019 to 172,000mm last year. And 2020 obviously saw the bushfire crisis drive up written premiums considerably.

DIA Rainfall v Premiums

However, again leveraging data from APRA, while Gross Written Premiums have increased, the profitability of the general insurance segment has declined. In fact, it became unprofitable in 2020, losing about $144 million that year before recovering last year (up about $140m) and facing another down year this year (currently down about $11m). The data show that paid claims have increased from 1,901 in 2017 to 4,801 in 2020 and 4,509 last year.

In short, when insurers’ profits fall, premiums increase. This is yet another driver of inflation and higher living costs for Australians, albeit one which is largely underdiscussed by the general public.

So what can we do about it in the near term?

Climate change is a slow killer, and the decarbonisation of the Australian economy needs to take off.  The Australian Government has been quick to put forward its climate bill, looking to enshrine into law two national greenhouse gas emissions targets: a 43 per cent cut below 2005 levels by 2030, and to net zero by 2050.

Note the timelines here: eight years in advance, and another 20 after that to reduce emissions. While this is a great first step to put climate action into law and deliver Australia key targets to achieve in the long term, unfortunately, this means very little in the near term. Many projects already in the works to reduce our reliance on fossil fuels are long-term solutions which won’t address the increases required by the insurance industry to remain profitable, nor the consumers and businesses that rely on them in the immediate term. We can still expect climate change to enact vicious events on our nation, and that in turn will lead to higher premiums.  

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It means that insurance – along with wages, supply chain delays and rising interest rates – is contributing to massive inflation across Australia. Furthermore, businesses are increasingly exposed to climate risk in the near term as insurance and other factors conspire to drive down profitability.

But insurers are willing to drop premium costs – they don’t want them this high. They want to attract people to take up insurance and the higher the costs and the premium, the less likely companies and consumers are to pay for it.

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So, as we commit to decarbonisation strategies, we will eventually see change. Our thinking needs to be holistic, short, and long term and comprehensive across the entire decarbonisation lifecycle. If we consider the industrial consumers of energy, we need to mature the state of Environment, Social and Governance (ESG) decision making within business. We need businesses to take a stronger stance, understand their emissions and build climate risk into their modelling, and make change at the board level. Major government projects can only do so much; real change can be made at the board level on down.

In the near term? Sadly, we’ll have to get ‘used’ to catastrophic climate events, and thus also become accustomed to the increased costs associated with recovering in the aftermath.

Aiden Heke is the CEO of Decision Inc. Australia, a leading independent data and analytics consultancy.

 

For more informations, Read Australian Finacial Review piece on our study!

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