Crikey - Nick Feik
Premiums in disaster-prone regions have increased by up to 400%,
posing a systemic financial risk. Don’t expect it to be an election
issue.
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Flooded houses are seen in Oxley, in Brisbane, after Cyclone Alfred, March 10 (Image: AAP/Jono Searle) |
On the day Treasurer Jim Chalmers delivered his budget, an Austrian insurance executive, Dr. Günther Thallinger, published a short essay
on LinkedIn that made a mockery of the government’s long-term plans and
projections.
The board member at Allianz SE was writing about a
fast-approaching and existential financial risk — one that appeared
nowhere in the treasurer’s speech and will barely rate a mention in the
election campaign.
Thallinger’s succinct warning regards
climate-related weather events and the global insurance industry. “Heat
and water destroy capital,” he writes. “Flooded homes lose value.” They
don’t just lose value, though; houses can become uninsurable. This has
far-reaching consequences. “A house that cannot be insured cannot be
mortgaged. No bank will issue loans for uninsurable property. Credit
markets freeze.”
The insurance industry has historically
managed its own disaster-related exposure, but insurers will very soon
no longer be able to offer coverage for many of these risks. “The math
breaks down: the premiums required exceed what people or companies can
pay,” Thallinger writes.
The insurance industry is already shifting
its business model in response to this risk by lifting premiums and
declaring entire regions uninsurable. Large US home insurers, to ensure
their survival, are simply exiting California over its risk of
bushfires, and many companies have stopped offering new policies in
Florida due to ongoing storm risk. (Five hurricanes in America last year
alone caused hundreds of billions of dollars in damage.)
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Climate determined the date of the election, yet remains utterly absent from it. |
This is only the start of insurers “adapting” as they struggle to cover growing disaster bills. Extreme weather phenomena are driving direct physical risks not just to homes but also to land, roads, power lines, railways, ports and factories globally.
In Australia, the McKell Institute estimated
the direct cost of natural disasters could reach $35 billion per year
by mid-century, an average of more than $2,500 per household per year.
These costs are already rising rapidly: in Australia, every year since
2013 has seen more annual insured losses than the combined losses of
between 2000 and 2004.
Insurance premiums are spiking globally,
which means non-renewals (people cancelling their insurance) are also
increasing. The rate of home insurance non-renewals has risen across the
US, at least tripling since 2018 in more than 200 countries. In Australia, home insurance premiums rose an accumulative 56% between 2020-23.
In some cases, according to the Insurance Council of Australia, insurance premiums in disaster-prone regions have increased by up to 400% in recent years. Research from the Actuaries Institute last year showed that nearly one in eight Australian households
— 1.25 million people — now pay more than four weeks gross income on
home insurance premiums. One in 20 are paying almost two months gross
income on home insurance.
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A swimming pool is surrounded by burnt remains of homes in Southern California on January 10, 2025. The damages from the California wildfires were projected to exceed $135 billion (Image: Sahab Zaribaf/Middle East Images) |
With vulnerable regions growing inexorably, this situation is set to worsen.
More people exiting the insurance market
means more people unable to afford to rebuild their disaster-hit homes:
families who ditch their home and contents insurance would lose
three-quarters of their wealth if their home was destroyed, according to
research by The Australia Institute.
Disaster-hit areas, which are already the
most vulnerable, will remain unreconstructed after disasters, not just
because of rising building costs but also because insurance and finance
are simply not available. The World Economic Forum Global Risk Report
2024 predicts that more than half a million Australian homes will be uninsurable due to extreme weather risks by 2030.
Whole areas in northern Australia and down
the east coast (starting with Lismore) are already under irreversible
threat as a result. And as temperatures rise and storms spread, the
financial risks will mutate and multiply.
“Entire asset classes are degrading in
real time,” Thallinger writes, “which translates to loss of value,
business interruption, and market devaluation … This is a systemic risk
that threatens the very foundation of the financial sector. If insurance
is no longer available, other financial services become unavailable
too.”
Real estate is the largest investment
class of all, but these same pressures apply to infrastructure,
transportation, agriculture and industry. Without the ability to price
and manage climate risk, basic investments are impossible. “The economic
value of entire regions — coastal, arid, wildfire-prone — will begin to
vanish from financial ledgers. Markets will reprice, rapidly and
brutally. This is what a climate-driven market failure looks like.”
Governments may try to address this
disparity between haves and have-nothings, but amid further disasters
and adaptation costs, there is a limit to what stretched budgets will
cover.
At the terrifying point where enough risk
cannot be transferred (no insurance), or absorbed (no state capacity to
cover losses), and risk cannot be adapted to (physical limits exceeded),
there is existential financial risk. “That means no more mortgages, no
new real estate development, no long-term investment, no financial
stability,” writes Thallinger. “The financial sector as we know it
ceases to function.”
The only escape from this fate is to keep
emissions out of the atmosphere, switching from fossil fuels. Somewhat
optimistically, Thallinger states, “The only thing missing is speed and
scale.” And as if to remind us he’s an insurance executive rather than a
climate activist, he adds, “This is not about saving the planet. This
is about saving the conditions under which markets, finance, and
civilization itself can continue to operate.”
The impacts of climate-driven extreme
weather events are already an ongoing item (albeit unspoken) in
Australian federal budgets, whether through increased disaster relief or
emergency services funding, or the rising cost of adaptation, or
rebuilding and insuring infrastructure, or a growing list of other
related expenses. However, this liability hasn’t translated into real
action to reduce global emissions.
Australia’s domestic emissions have barely
budged since 2005, while emissions from its fossil fuel
exports, already the third-highest in the world, are set to rise.
Even a moderately responsible budget would begin by taxing fossil fuel
companies properly and stopping subsidies altogether, using these funds
to supercharge mitigation and adaptation measures (including to mitigate
against insurance market failures). None of this is even the subject of
discussion.
Well, that’s not quite true. A
parliamentary select committee was established last year to assess the
impact of climate risk on insurance premiums and availability. Driven
and led by the Greens and chaired by Senator Mehreen Faruqi, the
committee issued its final report in November, 99 pages of which comprehensively discuss many of the threats raised above.
It made eight recommendations, including: a
national disaster risk map and database; that insurance companies
explain premium costs to policyholders; that the consumer regulator
monitors premiums; reformed taxes on insurance; an expanded reinsurance
pool for natural disasters and more disaster funds; and a review of
planning laws especially on development in high-risk areas.
Finally, it recommended government explore
a levy on coal and gas companies to offset insurance costs and fund
disaster mitigation measures. Labor and the Coalition, while noting many
of the report’s recommendations, both refused to support the key
recommendation on the polluter-pays model.
Four months later, Senator Faruqi
continues to advocate for this idea. “We know that one-in-two coal and
gas companies pay zero tax,” she says. “We need to bring them to the
table to pay their fair share, so communities don’t have to pay for how
they are damaging the globe.”
She draws attention to the recent budget
as a reflection of the Albanese government’s ongoing intransigence on
this issue: “It was really telling that the budget overview has an
entire section on disaster recovery and rebuild which does not mention
climate at all. In fact the whole 64-page budget overview does not mention the word climate.”
Labor’s budget also promised no new money
for climate action but more money for fossil fuel subsidies — even while
draining the public purse for more disaster relief. With the future of
capitalism itself relying on climate mitigation, this is the opposite of
responsible financial management.
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