Climate change impact on Australian premiums not significant to 2070: actuaries

Australia’s Actuaries Institute projects the premium increase from climate change will not be significant to 2070 – with hikes being small relative to the annual insurance industry premium pool and the impact of inflation – but government should take a long-term view on how to provide solutions.

The projections are included in the institute’s submission to Australia’s Senate Standing Committees on Environment and Communications, which is currently exploring recent trends and preparedness related to extreme weather events, including but not limited to drought, bushfires, heat waves, floods and storm surges.

Institute estimates are based on the mid-range climate change scenario (scenarios show increases in average temperature from 1 to 5 degrees by 2070).

The projected increase in premiums as a result of climate change is expected to be $1.5 billion (in Australian dollars). “To put this in perspective, it will take about 60 years to reach this additional cost and, on average, the incremental change each year will be small,” notes the institute, the sole professional body for actuaries in Australia, with almost 4,000 members.

Emphasizing that the projections are averages, “there will be considerable volatility from year to year,” the submission states. “It should be stressed that [the $1.5 billion] increase will not be spread uniformly across the policyholder base and will fall disproportionately on those at high risk.”

The institute estimated the current annual average insurance claims cost paid by private insurers for property damage related to bushfire, flood, cyclone, hail and wind. “We have not included storm surge due to the lack of data which makes the development of a robust estimate challenging, and noting that it is often not covered by private insurers in any case,” president John Newman notes in a letter accompanying the submission.

The average annual weather-related general insurance claims costs is currently estimated at $3.3 billion: $1.9 billion for home, $1 billion for commercial property and $0.4 billion for motor. That annual total is comprised of hail, $700 million; wind, $1.1 million; bushfire, $300 million; cyclone, $500 million; and flood, $700 million. The projections are a single point estimate as part of a range of possible results.

“In total, we estimate that the current average estimated general insurance claims cost of $3.3 billion per annum may increase by almost $1 billion to $4.3 billion per annum by 2070,” notes the submission.

The institute takes the view that the influence of drought and action of the sea – two perils primarily not met by private insurers – “can be significantly larger than the increase in privately insured costs.” As well, costs beyond those to private insurers include public infrastructure damage, non-property economic losses (such as the impact of increased unemployment) and life and health insurance.

“Based upon Australian and worldwide experience, the relative proportion of insured losses to total economic losses aggregated across all events is expected to be between 50% and 70% for mature insurance markets,” the submission states. Total economic loss is estimated “to be between $6 billion and $8.5 billion per annum by 2070 (as compared to $5 billion and $5.5 billion currently).”

The institute recommends that government provide for risk mitigation, public education, improved building standards, adaptation and rezoning of land affected. Government should “take a long-term view on how to provide solutions to individuals who will be most affected by climate change, for example, those living on the coast in low-lying areas or flood zones or in bushfire-prone areas,” the submission notes.

“Where mitigation is not viable, the government should sponsor the long-term project of appropriately dealing with the social issues arising from existing properties becoming unacceptably high risk. This would involve re-zoning of land and financial support for current owners to enable transition,” it adds.

Under climate change and in the absence of significant risk mitigation initiatives, the institute notes the following are likely:

• more properties will be at risk of flood, cyclone and storm surge, and will become uninsurable and unaffordable;
• bushfire-prone areas will increase (small pockets may become uninsurable) but the additional cost for most is likely to be spread over the community;
• coastal inundation will remain uninsurable; and
• premiums may rise for storm and hail, but the additional cost will be spread over the community.

The standing committee was originally scheduled to report its findings by Mar. 20, but its deadline has been extended to June 26.