AFR - James Fernyhough
If you want to know the mundane, annoying reality of climate change,
talk to an insurer. They won't paint apocalyptic pictures of wars and
famines, or of seas lapping against the 20th-floor windows of
skyscrapers. They'll tell you about all the boring but endlessly
irritating ways climate change will make life worse. Two words: water
damage.
The general insurance industry is taking the financial
risks of climate change more seriously than any other industry – with
the
possible exception of coal miners, for very different reasons – because it's already hitting their bottom lines.
IAG and
Suncorp,
two of Australia's biggest insurers, reported falls in half-year profit
in February, and in both cases extreme weather events were a major
factor. Insurance brokerage Steadfast,
announcing its own results, predicted an increase in extreme weather events would push insurance premiums up for at least another two years.
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| Local residents in flood water in the suburb of Hermit Park in
Townsville. Insurers want properties to be better strengthened against
such extreme weather events. Dan Peled |
Climate change will only make things worse. According the CSIRO's 2018
State of the Climate report,
Australia's warming climate will bring more extreme weather events:
floods caused by more intense rainfall and rising sea levels, wind and
rain damage from more intense tropical cyclones; and increased bushfires
as a result of hotter, drier weather in southern Australia.
There are two ways of dealing with this. One is the
faltering international effort to reduce greenhouse gas emissions, which would limit warming and avoid the worst outcomes. The other is to prepare communities for the worst.
Insurance companies have generally avoided weighing into the
politically-charged emissions debate, focusing instead on building
resilient communities. That essentially means flood and storm-proofing
properties. Both IAG and Suncorp have teams dedicated to understanding
changing weather patterns.
"The first thing is making sure we're
doing the right pricing and underwriting, for the short-term
profitability of our business," says Mark Leplastrier, IAG's senior
manager natural perils. But as increasing numbers of communities become
high-risk, he says the natural perils team is asking, "What are the
options there to reduce some of that risk?"
"We've
been sponsoring the Cyclone Testing Station since the early 2000s.
Early on they were focusing more on wind loads for instance. But I was
saying we're seeing a lot of damage through our claims caused by
wind-driven water into buildings."
He says claims data provided by
IAG and Suncorp to Cyclone Testing Station – part of James Cook
University – helped them understand exactly what was causing the damage,
and has resulted in changes to the National Construction Code.
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| Cleaning up after flooding in Townsville in February. Climate change is creating a high level of uncertainty for insurers. Dan Peled |
"So they've been able to drive changes to garage door specifications.
There are heaps of garage door failures that then lead to other
failures of buildings. They've also been able to change the outer
cladding features in the Australian standard. Bits of roof would fall
off because the specification wasn't quite up to scratch."
Leplastrier
says climate change introduces a high level of uncertainty. "Are we
building enough buffer there to be able to absorb enough of that
uncertainty? That's the kind of question we need to be more and more
involved with," he says. One key challenge is getting local authorities
to rethink flood danger before they approve new builds. He says where
local authorities will only consider the 100-year flood level – that is,
the highest flood level in a 100-year period – insurers are considering
much longer time scales.
"From an insurance perspective, we will
say what does to 200, 500, 1000-year flood look like, what are the
depths, and what are the financial consequences?" he says.
'We need action now'
Suncorp
chief executive Michael Cameron, following a 44.7 per cent fall in
profits in February largely thanks to a freak hail storm in Sydney in
December,
said the government needs to do two things:
first, it needs to force companies to adopt climate change action
plans; and second, it needs to invest more in climate change-proofing
Australian communities.
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| Suncorp saw a 44.7 per cent fall in profits in February largely thanks to a freak hail storm in Sydney in December. Nick Moir, Supplied |
So what is Suncorp doing itself to deal with the problem? The
Insurance chief executive Gary Dransfield cites the company's
"Protecting the North" program which he says is "targeted at reducing
the damage that cyclones can cause to homes, while also making insurance
more accessible". He claims the program has seen more than 40,000
policyholders in northern Australia reduce their premiums by
strengthening their home and property.
"Suncorp has also
championed flood mitigation in several vulnerable parts of the state,"
he says. "In 2013, we decided to cease writing new policies in Roma
which had been hit with successive floods during that period."
He
says this controversial move was "the right one" because it forced a
levee protecting the town to be built. As a result Suncorp could reduce
premiums, some by up to 90 per cent. Suncorp also advocated for the
South Rockhampton Flood Levee.
Insurance companies are not acting
out of the goodness of their hearts, but for straightforward business
reasons. If communities are open to major damage to increasingly brutal
weather events, then insurance companies will simply not be able to bear
the risk – which will leave everyone worse off.
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| Optus chairman Paul O'Sullivan says the telco is adapting its infrastructure to climate change forecasts. Christopher Pearce |
Dransfield says Australia needs to develop "a resilience culture",
and claims for every dollar spent on resilience there can be $13 of
benefits.
"That means communities, industries and governments
embedding resilience in more decisions, more planning and more business
practices. We don't want this cultural shift to be borne out of tragedy.
We are a smart, innovative and bold nation with enormous expertise and
know-how when it comes to disasters. We can build more cyclone, flood
and fire resilient communities but we need action now," he says.
Enter telcos and banks
Climate
change, believe it or not, won't only affect insurers. The Australian
Business Roundtable for Disaster Resilience and Safer Communities, which
promotes weather-proofing communities, includes the CEOs of insurers
IAG and Munich Re. But it also has representatives from the Red Cross,
Westpac, Investa Property Group, and Optus.
Optus chairman Paul
O'Sullivan says it's natural for a telecommunications company to be part
of the push because, as a vital infrastructure owner, they are
vulnerable to extreme weather events and, when extreme events do occur,
even more important to customers than usual.
He says since 2001
Optus has spent between $1 and $2 billion a year on its infrastructure.
"That gives us an authenticity and plausibility when we talk about these
matters," he says.
The goal of the roundtable, he says, is to
"assist government to make this a priority". He lists three key areas:
including resilience planning in all future infrastructure; improving
resilience when replacing or upgrading existing infrastructure; and
generally improving awareness. While he says governments are "very
receptive", money is an issue.
"I do think we're winning the
argument, but it takes time. I think the biggest constraint obviously
are budgets. So this obviously requires a redirection of some the
investment in budget into resilience," he says. A flick through the 2018
federal budget suggests the federal government does not consider the
issue a priority.
But like IAG and Suncorp, O'Sullivan says Optus
is doing plenty off its own bat, working closely with the CSIRO to
prepare for changes in weather patterns.
"We look at the CSIRO
model, and what that tells us is there is a significant potential for
cyclones to move further south, particularly along the Queensland coast
where there is significant population, and where we invest very
significantly in mobile coverage and in fixed line infrastructure," he
says.
"So what we've been doing along that coastline is upgrading
the quality of our mobile base stations and towers to be cyclone
strength much further south than we would have done historically. In
areas which are open to flood plain, we've been looking to raise the
height at which we put equipment, particularly riding equipment or any
sensitive electronic equipment, and we've also been doing work on
re-mapping the way we deploy electricity generators."
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