Fires, floods put insurance at risk

Climate change will exacerbate the threat of bushfires and drive up the price of insurance premiums, IAG warns.

Insurance Australia Group says climate change will exacerbate the threat of extreme bushfires, which will drive up the price of premiums andthreaten the industry’s viability.

In a Menzies Research report commissioned by IAG and tendered to a Senate committee investigating the recent infernos, dubbed Black Summer, the nation’s largest insurance underwriter warned that increasing natural disasters will render some parts of Australia uninsurable.

According to IAG, the evermore frequent threats of bushfires, cyclones, storms and floods are placing greater stress on insurance companies’ natural perils budgets, which will reduce claim affordability.

“This is a key concern for insurers and threatens the viability of the industry,” the report said of impending, more extreme, fire seasons.

IAG executive manager of natural perils, Mark Leplastrier, told The Australian that insurance costs in theshort term could be jacked up if underlying climate factors change premium price modelling, or if overseas reinsurance providers perceive Australia as a riskier environment.

“It is possible that reinsurers will change the risk in Australia and may adjust their premiums,” Mr Leplastrier said. “It won’t necessarily change the retainment from an insurer’s perspective, unless we think the models being used are not covering that type of event appropriately.”

IAG purchases backing from overseas reinsurance companies to assist in the funding of its domestic claims, particularly in relation to natural disaster incidents which are categorised as non-frequent events. IAG’s main reinsurance providers are Munich Re, Swiss Re and Hannover Re.

The report notes growing climate risks will trigger higher premiums over time, and disaster-prone areas will decrease in insurance affordability.

It said cities such as Brisbane and Melbourne will be harder to cover as significant urban areas are susceptible to flooding.

The report conducted by Menzies also flagged that Australia’s economic cost of natural disasters in 2017 was $18.2bn, equivalent to 1.2 per cent of GDP. It forecasts natural perils costs will grow by 3.4 per cent annually, rising to a projected cost of $39bn by 2050.

Mr Leplastrier noted the lack of co-ordination at a national level in response to bushfires and natural disasters is impacting the insurance sector’s ability to appropriately set risk.

“Bushfires don’t care about state boundaries, it is the same forest burning either side of the border,” Mr Leplastrier said. “We don’t really have a consistent way in which we look at risk.”

The report said current government funding for natural disasters focuses too heavily on the recovery and does not put enough resources into pre-emptive mitigation measures.

IAG is calling for the implementation of fuel reduction policies to reduce the threat of severe fires. It noted the introduction of a domestic biofuel industry could assist in reducing forest debris. “The bushfire risk is one of the more rapidly changing risks in Australia,” Mr Leplastrier said.