Rising cost of insurance, and what to do about it
Munich Re’s local CEO Scott Hawkins has published an article detailing his views on extreme weather events and the rising cost of insurance. Here is a summary of the piece:
Extreme weather events = insurance becoming even more expensive? The short answer is likely yes. Why, and what does the future hold? I’m glad you asked!
Things are getting tougher. The top three reasons why:
1. We are experiencing a trend of increasing frequency and severity of extreme weather events, and these are now occurring in areas not previously exposed.
2. We continue to build in areas overly exposed to extreme weather events – often in areas developed to provide lower cost housing – creating a socioeconomic problem for future affordability.
3. Building standards in many areas are based on a timeframe when extreme weather was much less severe and frequent than we are currently seeing, and will continue to see in the future – causing greater damage to these properties than experienced in the past.
Without mitigation and improved resilience, the premiums to cover the increased risks will be so high that people cannot afford them.
We know that mitigation and resilience will take time, but they’re vital if we want to make a real difference to the many communities of people who are impacted.
We need to look at how individual properties can become more resilient and able to withstand more extreme weather. We need to significantly increase mitigation to stop at-risk areas being exposed to extreme weather such as flood. We need these changes to ensure that as many people as possible have access to insurance at affordable pricing to protect their biggest asset, their homes.
The insurance industry is used to taking on extreme events and the associated volatility. But, what we are seeing, is the increase in the annual average losses which cannot be diversified. To constrain future price increases we need to reduce or at least limit these annual amounts.
This is not something that the insurance industry can do alone. It requires a coordinated and concerted effort by Government and the insurance industry. We must fund mitigation and resilience efforts for the existing assets base. Continuing to build in areas which are overly exposed and will become even more exposed in the future will be to our collective detriment.
The insurance industry has a wealth of knowledge and data which can inform better decisions about where we should and should not be building, now and in the future. And although climate risk has typically been in the domain of the insurance industry, increasing insurance affordability challenges in some regions is also shifting the risk towards the banking industry.
What does the future hold? If we do nothing, then what? This is a country where for two-thirds of the population, wealth is held in the family home.
Given this high proportion, if insurance premiums become unaffordable, it brings with it a huge economic risk to Australia. And it would be remiss of me not to acknowledge that inflation also plays a star role in affordability vis-à-vis the general rise in cost of living.
With coordinated pre-emptive action by business, government and the insurance industry, together we can limit the effects of the changing climate on our assets.
Munich Re as part of the Australian Business Roundtable for Disaster Resilience and Safer Communities found that for every dollar spent on mitigation can save at least two dollars in recovery costs. Their research found that “the total economic cost of natural hazard-triggered disasters in the 10 years to 2016 has averaged $18.2 billion per year…and this is expected to reach $39 billion per year on average by 2050, even without considering the impact of climate change”.
Stop and think about that for a moment. There is an immense opportunity to make our properties more resilient to extreme weather events, perform holistic land use planning to stop building in areas that are overly exposed to the changing climate, and fund mitigation in at-risk areas to better protect properties.
As part of the mitigation efforts, we also need to improve how we build. What needs to change in the way we design, plan and build to ensure infrastructure is resilient? What building codes need strengthening and what incentives do the public and private sectors need to invest in these areas?
Due to the increased frequency of extreme weather and related impacts, the Government are more engaged and active, however not to a level that is needed to contend with current and probable future impact.
I passionately believe the time for change is now. Decisive action is essential. A changing climate is not going away – but we can collectively work together to mitigate and build resilience – increasing access to affordable insurance and limiting future losses.
Lowering the economic risk and achieving affordable cover, will ultimately, and most importantly, create positive outcomes for families and communities across Australia.
The legacy we leave as leaders of the Insurance industry will be defined by what we do to limit climate change, how we assist to adapt to climate change and what products we create to assist in the transition to a net zero environment.
Click here to read the full article.
