NIBA CEO Dallas Booth shares his observations and insights on the role brokers play in managing climate change risk.
I saw a comment recently (out of the United Kingdom) to the effect that insurance brokers are ideally placed to assist their clients with the potential impacts of climate change. I must say, I had to think twice about this.
And then for Easter, I had the opportunity to have a look at two important documents.
The first one was from Swiss Re, their annual Sigma report from the Swiss Re Institute on the topic of natural catastrophes and man-made disasters. The report mainly covers events occurring in 2020.
The following was enough to get my focus and attention: We already have a high degree of certainty around some of the effects (and observations) relating to climate change. For example, global average temperatures have increased by 1.1 degrees since 1880 (even more in Australia), polar ice caps are melting, and sea levels are rising.
The most extreme weather phenomena are also directly or indirectly influenced by the temperature of the atmosphere and oceans. A warming climate may cause stronger cyclones; more intense rainfall and flooding (especially flash flood); more intense convective storms; longer and more severe bushfire seasons. Further, we can expect to see events occur in areas where they have previously not been experienced – cyclone and hail zones are expected to move poleward, and bushfires will occur in regions not previously vulnerable for fires.
As the climate is changing, the number of Australians living near the coastline increases, and the value of their property is also increasing. This means that the potential level of insured losses continues to increase when major events occur. All of this has to be funded from the available insurance premium pool.
The Swiss Re publication also goes on to look at Australia in particular, with some excellent commentary on the recent impact of fi re, hail and flooding. All of these are important contributors to the level of insured losses in the Australian market.
The second report I read was from the Australian Academy of Science and was potentially alarming. The report was called “The risks to Australia of a 3°C warmer world”.
On the one hand the report provides a lot of important information about the scientific basis of climate change. More importantly, science stresses “the need for the world to reach net zero emissions by 2050 as an absolute minimum, if Australia is to avoid potentially insurmountable challenges to its cities, ecosystems, industries and food and health systems”.
Deep within the report (section 9.5 refers) is the following statement:
Climate change poses a significant investment risk to businesses and the financial sector. Insurance firms are already facing substantially increased claims, many of which are partially or fully a result of climate related impacts. One in every 19 property owners face the prospect of insurance premiums that will be effectively unaffordable by 2030, costing 1 per cent or more of the property value per year. (my emphasis)
The availability and affordability of insurance cover for climate and weather-related events is already a major challenge for many parts of Australia. The reports mentioned in this article suggest that the challenges are only going to increase.
I do think it is important that insurance brokers make themselves aware of these risks and develop knowledge and expertise to allow them to discuss these matters with their clients, and to provide advice on how best to manage and mitigate some of those potential losses. It may be that in the future, the insurance industry will not be able to carry those risks. That is not something I would like to think about.
Dallas Booth, NIBA CEO