Bad weather blowouts to hammer insurance sector for next decade, AON report warns

Natural catastrophes remain the most constant cause of costly insurance blowouts and look set to only grow as climatic conditions change.

The hailstorms that swept the east coast on January 18, 19 and 20 last year were the single most costly event to hit insurers for 2020, causing 130,000 claims and $1.66bn in losses. Picture: Lachie Millard

Natural catastrophes remain the most constant cause of costly insurance blowouts and look set to only grow as climatic conditions change, according to a report released by a leading global risk consultancy.

AON’s Weather, Climate, and Catastrophe Insight annual report found natural catastrophes cost the Australian insurance market close to $1bn on average each year.

But this figure was blown out last year by a staggering four major natural catastrophes, with losses topping $4.5bn.

The hailstorms that swept the east coast on January 18, 19 and 20 last year were the single most costly event to hit insurers for 2020, causing 130,000 claims and $1.66bn in losses.

Still, damage from the storms was well below that of the 1999 Sydney hailstorms, which cost insurers $5.6bn in current dollar terms.

AON head of catastrophe research for Australia and New Zealand James Knight said hailstorms had the potential for destruction and cost due to their potential impact on cities.

“Hailstorms tend to occur during the afternoon and if one strikes during rush-hour traffic, the aggregate insurance claims eventuating from an event can easily breach $1bn. All this damage with an event that can last literally minutes,” Mr Knight said.

“The severity of hail losses tends to be reasonably low compared to say bushfires or floods, but it is the sheer volume of claims that cause them to be so expensive.”

The summer of bushfires scorched much of the east coast, but most property destruction was in rural or regional areas.

The AON insurance outlook suggests the continuation of three key climatic drivers: the El Nino Southern Oscillation, the Indian Ocean Dipole and the Southern Annular Model are all set to drive catastrophic weather events into the next decade.

Damage from the hailstorms that hit Sydney in 1999 cost insurers $5.6bn in current dollar terms.

AON finds Australia’s cities “heavily exposed to a wide variety of extreme weather perils”.

“If the behaviour of these weather perils changes over future decades (either upwards or downwards in their frequency and/or severity) because of continued anthropogenic warming, resulting insurance losses are highly likely to follow suit,” the AON outlook said.

The risk consultancy suggests potential mitigation strategies to reduce property damage, but notes building costs are “not currently focused on reducing the costs associated with property damage”.

“Widespread betterment will take time and most property within the built environment will remain non-code-compliant for many years,” AON said.

Insurers have been hit by the double whammy of exploding costs and plummeting returns on investments typically used to offset costs.

The latest APRA data revealed a 98.9 per cent turnaround in net profit after tax for the insurance industry last year.

The data found insurers only saw a 0.1 per cent return on net assets for the year after gross claims ballooned 23.7 per cent.

AON head of analytics Peter Cheesman said there was no indication extreme weather events would become uninsurable.

“History shows the industry has remained adaptable to changing risk criterium and there is no reason to presume that will be any different in the future,” he said.