February 25, 2013
Insurance premiums are based on past events, which makes it hard to factor in the looming threat of climate change. Devastating floods, sweeping bushfires, severe typhoons and hail. Ask weather experts and insurers about the increased frequency of severe weather events, and the words “climate change” are often thrown into the mix. But press the topic further, and the conversation slows. Question the effects of climate change on insurance premiums, and experts become even more cautious, picking their words carefully. While players argue that climate change is a long-term phenomenon that is likely to contribute to severe natural catastrophes in the future, insurance companies say factoring these risks accurately into future premiums costs is impossible. Recent research from Citi showed some insurance companies were reluctant to discuss the potential impact of climate change on reinsurance costs. Listed Insurance Australia Group referred Citi to the “Risk Frontier” work that appears to suggest limited evidence for a rise in frequency and severity of events in Australia, while Suncorp talked of taking a “through the cycle view”. Australia’s largest global insurer, QBE Insurance Group, did not address the question of climate change explicitly but referred to a recent external model upgrade that assumes higher catastrophe impacts, particularly Atlantic hurricanes and UK wind events. Insurance bosses argue it is almost impossible to raise premiums to reflect increased weather-related risks decades down the track, as premiums are priced almost entirely on the impacts of past events. But there’s little doubt that in the long term, premiums will rise thanks to increasingly severe and frequent natural catastrophes. Newly appointed Allianz Australia boss Niran Peiris argues that above-average rises in insurance premiums have already occurred in recent years, particularly in response to the Queensland floods and cyclone Yasi. “Was this string of extreme weather events due to the impact of climate change?” he said. “We will probably only know the answers to these questions as the future unfolds, or maybe only in hindsight. Either way, insurers will adjust premiums in response to their long-term claims experience.” The observations come after natural catastrophes wreaked insured losses of around $US65 billion in 2012 alone, Swiss Re figures show. The cost, however, is moderate compared with the devastation of the Japanese tsunami, floods in Brisbane, Christchurch earthquakes, and other events that cost $US120 billion in insured losses globally during 2011. IAG Australia direct insurance chief executive Andy Cornish said past evidence and current research suggested more frequent and severe catastrophes would occur over the long term, but the group was cautious about linking forecast trends with climate change. Natural disaster mitigation, including building flood levees, would go a long way in driving down future catastrophe bills and insurance claims, Mr Cornish said. Similarly cautious about the issue of climate change is bancassurer Suncorp Group. Mark Milliner, chief executive of personal insurance at Suncorp, said the company advocated mitigation to help manage the costs of future disasters. “I think it’s very hard for us to comment on scientific judgments,” he said about the cost of climate change. “The other point I’d make is that the risk around climate change is one strategy risk that faces the insurance industry – there are many others.” Citi’s research, written by Elaine Prior and analysts Nigel Pittaway and Mark Tomlins, found insurance companies should in theory adapt their businesses to the effects of climate change, but their operations could face tough challenges if the changes arrived faster than anticipated.