Australia’s wild summer and the implications on insurance premiums
The recent bush fires and flooding events across Australia have highlighted the increasing trend towards extreme weather events, evidenced by the Australian Actuaries Climate Index. Whilst used as further confirmation of climate change, this index makes it very clear that the frequency of these extreme weather events has continued to rise since 1981.
How can the insurance industry mitigate the effects of this wild weather?
Whilst some policy holders have reported significant increases in their insurance premiums, this is not a nationwide occurrence. However, it is fair to say that the recent extreme weather events in Australia are expected to result in claims totalling more than $2.5 billion. It’s also fair to say that catastrophic weather is part of living in Australia and the insurance industry is well aware of these issues.
In fact, early in 2019, the industry was already aware of the impending bush fire season and had taken precautionary measures to increase their disaster budget. This means that premium rises are less likely in the short term. More data however, is needed before any long term predictions can be made, particularly if climate change continues to increase the risk to insurers. If your business is in a high risk area however, it’s likely that your premiums will increase at some time in the future.
Whilst the above named index highlights the risk of extreme weather events, it also allows the industry to develop better models of climate risk. This in turn helps insurers to provide Australian businesses with more accurate estimates of their premiums, based on hard facts.
The index also allows companies to better manage the risk of extreme weather events on their businesses, possibly relocating to a lower risk area. The government and construction industry can also investigate whether the impact of extreme weather can be mitigated by promoting building developments in lower risk areas.
Industry initiatives to deal with these increased risks
The insurance industry has committed itself to improving awareness and encouraging a positive response to climate-related risks. For example, the Insurance Development Forum is working towards building greater climate resilience within the industry, resulting in better protection for people, businesses and communities. The UN Environmental Program for Sustainable Insurance has been working with industry leading insurers to develop new risk assessment tools that will help to better understand the impacts of climate change on insurance risk. The InsuResiliance Global Partnership for Climate and Disaster Risk Finance and Insurance Solutions aims to strengthen the resilience of developing countries against the impact of disasters.
Individual insurers can also help by properly diversifying their portfolio between liabilities and investments to avoid being overly exposed to higher risks. This may involve including portfolios of companies that are fairly climate resilient, and thereby offering lower risks to insurers. Offering lower premiums to business that lower their risks could also be a part of this rebalancing of their risk portfolio.
Making sure that businesses are not underinsured is also another strategy to reduce the risk of extreme weather events on business owners. To decide what type of insurance is suitable for your business, talk to Stella Monteleone today.