Weathering the costs

By Bronwyn Adcock

to examine how we can better prepare for and respond to all kinds of natural disasters. Public hearings began in late May, with witnesses appearing via oddly framed video streams from home offices and spare rooms, the country still in lockdown.

On day one, in the afternoon session, representatives appeared from Australia’s biggest insurer, IAG Limited, and the professional body for actuaries, the Actuaries Institute. Both gave submissions that identified a fundamental flaw in our response to natural disasters; Australia still spends a disproportionate amount of money mopping up after a disaster, and not enough on risk mitigation and adaptation – we keep trying to shut the gate after the horse has bolted.

“Government funding should further prioritise risk reduction which will reduce the need to spend on disaster recovery,” said the IAG submission.

Another major insurer, Suncorp, which gave a submission but was not asked to appear, was even more direct: “When it comes to natural disasters, Australia is currently stuck in a cycle of disaster, rebuild, recover, repeat.”

This is not a new point; it’s been made in numerous other reports and inquiries, most notably by the Productivity Commission, in an inquiry called in 2014 by then treasurer Joe Hockey. Its report, “Natural Disaster Funding Arrangements”, found we “overinvest in post-disaster reconstruction and underinvest in mitigation that would limit the impact of natural disasters in the first place”.

(In 2018, a taskforce working under Peter Dutton’s Home Affairs department developed a National Disaster Risk Reduction Framework – on paper, a proactive approach to disaster management. But to date, no implementation plan has been published.)

For insurers, who must pay out claims when a natural disaster hits, and actuaries, who must ensure insurers remain financially viable, the extreme weather patterns emerging as the climate changes are raising the stakes and increasing the urgency to act.

Mark Leplastrier, from IAG, told the commissioners the company has partnered with the Us-based National Center for Atmospheric Research to better understand severe weather in a changing climate. He said this research shows “intense cyclones will become more frequent” in Australia and there will be a “broadening of the areas affected by cyclone”, including a move into north-eastern New South Wales. Bushfire risk will increase in all locations.

It has released this research, he said, because “there’s an enormous amount of activity right now in disclosing climate-related financial risk for the finance industry” and it wants its work “to act as a base for others to build on, and hopefully we can collectively move forward, establishing more centralised and accurate sources of information”.

Likewise, the Actuaries Institute, which says climate change “poses a serious risk to industries and financial institutions”, told the commission it has set up the Australian Actuaries Climate Index, a tool that tracks trends in extreme weather and is available to actuaries, companies and the general public.

But there is a flipside to this kind of datagathering. Insurers are increasingly using it for riskbased pricing – increasing insurance premiums for specific locations, based on their exposure to extreme weather events. It means people living in some areas are finding their premiums becoming more expensive, and potentially unaffordable.

Insurance affordability was barely touched on by the commissioners (there is another inquiry by the Australian Competition and Consumer Commission under way into this issue), but in the written submissions it was identified as a major issue for government to address. The Actuaries Institute said that “mitigation and adaptation measures can reduce insurance premiums”.

Risk management company Risk Frontiers gave evidence about the cost of this bushfire season. In terms of building damage, it is expected to be comparable to the most damaging fire season – if not the worst – in the past century. However, in a sobering reminder that, as bad as it was, it won’t be the costliest natural disaster we see, Risk Frontiers also presented an analysis of the top 20 postcodes in Australia that pose the greatest risk for financial loss of insurable assets. The risk in all 20 areas was from either flood or cyclone – bushfire did not even make the list.

The first day’s hearing had almost ended when Sharanjit Paddam, representing the Actuaries Institute, interjected with a notably non-financial point.

“There’s some things you can’t compensate for,” he said. “Insurance is almost the piece at the end that tries to financially compensate people”, but it’s a “suboptimal outcome because people’s lives, even if they’re insured to the full extent of the damage, are very adversely affected by these natural disasters”.

This is not news to the communities that experienced this summer’s bushfires, where high levels of trauma and distress still exist.

In Malua Bay, on the south coast of NSW, retiree Robyn Butcher is back living in her suburban cul-desac, where her home is one of only four on the street that survived the fires. Insurance has paid for her destroyed sheds and fences, and she finally has the soot out of the house. But nothing will ever compensate for the damage to her lungs from bushfire smoke, and the terrifying experience of cowering on a beach, watching the fire tear through her town, convinced she was going to die. She tells me that when she heard a news report from the royal commission that said these kind of bushfires could reoccur, she thought, I’d rather die than go through that again.

“When it comes to natural disasters, Australia is currently stuck in a cycle of disaster, rebuild, recover, repeat.”

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