IIt was the Monday after the Warragamba Dam overflow that Dr. Kim Loo began to understand the magnitude of what was happening. A patient had called her clinic in Riverston in western Sydney to cancel an appointment to pick up a prescription as the bridge to the city was closed.
Loo, president of Physicians for the Environment of New South Wales, has lived and worked in Riverston for much of her life. Over the years, you’ve seen orchards once run by Maltese families in the floodplain gave way to new housing as developers paved the open ground.
Now it was happening again. First came the fire, now came the flood.
“This isn’t just the floods, it’s the smoke and the heat and Covid and everything else,” she says. “Every disaster, it seems that we are on the pointed end. We already reached two degrees above average during the black summer. We had the hailstorms in East Sydney. Now, with this, I imagine that entire areas will not be insurable. “
After the events of the last two years, that question: what will happen to insurance? – is proving to be increasingly important to entire communities and the insurance industry as they face a climate-shocked future.
Mark Leplastrier, an atmospheric scientist who heads the Insurance Australia Group’s (IAG) natural hazards unit, says this specific flood event was not a surprise. As Australia moves between the El Niño and La Niña cycles, significant weather events tend to clump together. The role of climate change, Leplastrier says, is to make climate events get a little worse with each passing cycle.
“Every disaster, every major new event – a cyclone, a flood, a wildfire, a hail storm – provides an opportunity to test your underlying assumptions,” says Leplastrier. “The main thing is that, with climate change in the background of a cycle of natural variability, if the same event returns and there is more warming, there is additional precipitation or intensities associated with that.
“So that’s the question: how exactly will it play out?”
The industry calls these events “natural hazards” and classifies them according to their severity. Floods, fires, and hailstorms are “secondary hazards,” events that can sometimes last only a few minutes or hours, but accumulate millions of dollars in damage. The “primary hazards” are major events like earthquakes and cyclones.
While a flood can be costly thanks to the costly recovery process that follows, the nightmare scenario is for a cyclone to strike a densely populated area in a region like southeast Queensland. While the possibility of this ever happening would have been considered zero, climate change means that the possibility can no longer be completely ruled out.
And the cost of these events is increasing. Although it is too early to know the full cost of the current one-in-100-year flood, the Insurance Council of Australia has already declared a catastrophe for New South Wales and southeastern Queensland. With more than 17,000 insurance claims Released Wednesday morning, an early industry estimate puts the estimated total damage in two states at $ 254.2 million.
In contrast, the cost to just four insurers (Allianz, QBE Insurance, Suncorp and IAG) in the wake of the Black Summer wildfires was $ 721 million. Meanwhile, the industry as a whole lost $ 5.3 billion paying for damages caused by wildfires, floods and hail during the first quarter of 2020.
The scale of the damage and the size of the losses suffered by IAG and Suncorp alone was so great that the companies consumed their catastrophe allowances and had to resort to their reinsurance contracts, insurance for insurers, leading to the world’s largest reinsurer, Swiss Re, a publicly whipping companies for not constantly predicting the cost of natural disasters.
Seen over time, the impact is marked. Charts published by the Australian Prudential Regulatory Authority (Apra) recording the financial profitability of the insurance industry were dominated by smooth curves prior to 2015. Beyond that point, the lines become jagged and the charts jagged. .
The longer this lasts, the more the industry has been passing the cost on to the consumer.
Dr Chloe Lucas from the University of Tasmania studies the social impacts of climate change and says prices are rising as insurers change the way they do business. Under the old “community model,” the price of coverage would be calculated at the neighborhood, suburb, town or region level. This meant that those who were slightly more exposed to floods or fires would have their coverage subsidized by those who weren’t and all were better off.
Thanks to big data, insurance companies can now break down to the single home level and price accordingly, increasing premiums for some and lowering them for others.
“The industry has moved as best practice towards individualized pricing as it gives a signal about risk,” says Lucas. “People will become more aware of climate risk and more likely to move, but in reality people cannot afford to move and they get stuck there.
“That means people will have to pay ridiculous prices or they will not have any coverage.”
The result has been a growing inequality between those who can pay and those who cannot. The growing division was so concerning to Apra that its executive board member, Geoff Summerhayes, gave a stern warning. in a speech last October.
“Apra’s biggest concern when it comes to the impact of weather-related risks on insurance is therefore not the possibility of an insurer becoming insolvent, it is the possibility of general insurance becoming unaffordable or unaffordable. not even available in some parts of Australia, ”he said.
“Without access to adequate general insurance, households and companies would have less confidence to invest or take financial risks in vulnerable areas of the country. Access to credit may be reduced, while the credit risk of existing loans would increase. Communities would take longer to recover after disasters, and a greater share of the financial burden of recovery would fall on governments and, by extension, taxpayers.
“For these reasons, countries with larger insurance protection gaps tend to suffer more serious economic consequences after disasters, such as reduced productivity and higher debt levels.”
In some parts of Australia, what Summerhayes was describing was already a reality. In the cyclone-prone north, the cost of home insurance has increased 178% since 2007, while the price of combined home and contents insurance has increased 122%.
Since then, these comments have been read as a rebuke to the attitude taken by some in the industry that as the climate crisis worsens, the simple solution is to pass the risk – and the cost – onto the consumer. In one example, Nicholas Scofield, the director of corporate affairs for Allianz Australia, appeared before a hearing on the Senate bushfire investigation in July 2020. The committee chairman, Labor Sen. Tim Ayres, asked him if climate change it represented an “existential threat to the United States.” industry in some parts of Australia ”.
“I don’t think it’s a problem in that sense, simply because we can change the price for each customer every year,” Scofield said. “We can look at the premiums we must charge and the amount of reinsurance we must purchase to make sure our balance sheet and our shareholders are protected.
“Customers put up with it at the end of the day. As I said before, it has been a particular concern of Allianz for some time that we already see risks from natural hazards resulting in premiums that customers cannot afford. “
At the time, the moment was interpreted as a frank statement of intent from the industry. While he had called for more mitigation work to be done to adapt to the effects of climate change and for tax reform to reduce the cost of premiums, within Australia there have been no public calls for the government to act to reduce pressure on companies. emissions. .
In fact, during that hearing, the industry largely accepted that a world 2 ° C warmer on average was now locked in, a position outlined in the IAG report on climate change.
“Therefore, a 2 ° C target is unlikely to be achieved and therefore the risk of catastrophic events will significantly increase, even compared to 1.5 ° C warming,” the report said.
Unless the underlying cause can be addressed, extreme events will continue to hit the people of the region and the working class.
“If you look at a map of New South Wales, there are about 14 local government areas that have been flooded that also had these wildfires,” says Financial Counseling Australia’s national coordinator for wildfire recovery, Peter Gartlan. “At the moment, all the risk is with the consumers. The second problem is that insurance premiums are going to increase, they are already increasing, and the government has to get involved in that issue.
“Otherwise, if we are going to have these disasters in response to climate change, then the cost is passed on to the individual.”
Gartlan has been collecting data on the 7,000 people who have sought help from financial advisers after the wildfires. Most need help writing grant applications, managing pre-existing debt, getting mental support, and most importantly, the lack of insurance.
Gartlan talks about a nonprofit organization that helps people in the Snowy and Bega Valleys, among other places. “They gave 600 batches of emergency aid, on average about $ 2,000,” he says. “They also did an informal survey: do you have insurance? Are you fully covered?
“So 50% of those 600 people didn’t have insurance. About 25% were underinsured and the other 25% believed they had enough insurance. “
Because most insurance contracts today are “sum insured,” Gartlan says many find out after a disaster that they have incorrectly estimated the cost of rebuilding their home or business and are therefore forced to obtain new ones. loans or move out altogether.
“It’s apocalyptic, really,” says Gartlan. “And these events have been one after another. They have not been spaced. I don’t know how people are going to react. “
George is Digismak’s reported cum editor with 13 years of experience in Journalism