On Insurance

Insurance and extreme weather events

The loss of assets due to a catastrophic event is not included in the calculation of gross domestic product (GDP), but the rebuilding after a catastrophic event has a positive impact on GDP. Therefore, it is useful to use other information, such as insurance figures, to assess the economic effects of climate change.

According to the Australian Business Roundtable on Climate Change April 2006 report The Business Case for Early Action, 37 of the 40 largest insured losses from natural catastrophes globally since 1970 have been weather related. The total economic cost of Hurricane Katrina in 2005 is estimated at US$135 billion, including up to US$45 billion insured losses.

Whilst the increase in insured losses from natural catastrophes cannot be directly linked to man-made climate change (indeed the increase in insured losses is mostly due to demographic changes and insurance penetration), the tendency toward more extreme weather events is being factored into insurance companies' product pricing. The US Government Accountability Office (GAO) suggested in its submission to the Senate Committee on Homeland Security and Governmental Affairs in April 2007 that while many large private insurers are factoring climate change into their annual risk management practices, federal insurers were falling behind due to their lack of comparable information on the long-term financial impacts.

Is insurance cover at risk from climate change?

A disproportionately large share of insurance industry losses come from extreme weather events. Thus, changes in the nature and frequency of these events could appreciably alter the price and availability of insurance. The task of managing risk becomes increasingly difficult if past weather patterns are rendered poor predictors of future weather patterns due to climate change. There is growing anxiety within insurance markets about the implications of climate change for that industry, given that climate science suggests an increase in both the frequency and severity of storm activity as the earth's climate systems become more active (energetic). According to a paper by Insurance Australia Group (IAG), human-induced climate change is a reality which must be addressed with appropriate urgency.

The insurance industry in Australia, like in many other countries, is also vulnerable to other catastrophic events occurring worldwide through its interconnection with reinsurance. Both natural and man-made disasters trigger a sequence of financial events for insurers and reinsurers. Large and unanticipated losses lead to large insurance payouts, which reduce insurers' and reinsurers' capital reserves and heighten their uncertainty about losses from future events. As the supply of reinsurance dwindles, sometimes simultaneously with an increase in demand, insurance premiums climb.

How vulnerable is Australia?

In Australia, 19 out of the 20 largest property insurance losses since 1967 have been weather related, the largest being the December 1989 Newcastle earthquake ($A4.3 billion in 2007 dollars). Australia is prone to bushfires, cyclones, hail, storms, drought and flood, all of which are expected to increase in frequency and/or intensity due to climate change.

Australia is vulnerable to rising sea levels and coastal inundation and erosion, both of which are expected to occur as a result of climate change. According to a CSIRO pamphlet published in 2002, more than 80 per cent of Australia's population lives within 50 kilometres of the coast, with approximately one quarter of Australia's total increase in population concentrated within 3 kilometres of the coast. Thus, the increasing populations in more vulnerable areas will exacerbate future losses from these events.

Problems for insurance consumers?

Consumers of insurance may face a number of problems as a result of climate change, such as:

  • A steep rise in real premium charges.
  • Insurance payments coming from a limited pool of funds. Once a limited pool is exhausted no more insurance benefits are provided .
  • The withdrawal of coverage for certain types of events in certain areas, such as flooding in low lying areas.
  • An increasing amount of under-insurance as consumers underestimate the risks of property damage from extreme weather events.
  • Increased levels of non-insurance and consequent increased exposure to total loss.
  • Requirements for modifications to property before insurance cover will be provided. For example, a requirement for the installation of metal roofs before insurance against hail damage will be provided.

In this environment, governments may come under increasing pressure to cover losses not insured by the private sector.

Insurance industry response

The Insurance Council of Australia outlined the following responses to the above issues in its April 2008 paper, Improving Community Resilience to Extreme Weather Events:

  • strong support for mitigation measures—emissions control and emissions trading
  • insurance product innovation and
  • increasing community resilience, for example through better building codes.

Further Reading:

  • Allen Consulting Group, Climate change risk and vulnerability—promoting an efficient adaptation response in Australia, Report to the Australian Greenhouse Office, Department of Environment and Heritage, March 2005.
  • United Nations Environment Program Finance Initiative, 'Insuring for Sustainability', Inaugural report of the Insurance Working Group of the United Nations Environmental Program Finance Initiative, 2007.


    27 October, 2009

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