As the severity of extreme weather events all over the world has increased over the past several years this is having a continuing impact on the insurance sector. Insurers have sustained substantial losses as a result of extreme weather claims and are also confronting mounting difficulties in assessing these types of risks.

Unprecedented changes in the patterns of extreme weather events increase the extent and expenses involved in damage claims, making accurate underwriting of risk impossible and reducing the availability of business property cover, pushing premium pricing up and exposing owners and governments to escalating costs.

"No one ever wants to make an insurance claim. It's because something has gone wrong," Gallagher Head of Claims Adam Squire says. "While the claims profession has improved how it handles these events, we are increasingly seeing delays through limited availability of contractors, building products, motor repair capacity and so on. The answer has to be mitigation and preventing the damage in the first place."

Extreme weather events create an unsustainable situation for insurers

The trend over the last 30 years is of increasing total losses with a decreasing proportion borne by insurers, according to CoastAdapt's white paper, 'Insurance and Climate Change'. In some regions extreme weather events have boosted the cost of insurance premiums, by as much as 1000% to offset insurer losses in disaster affected areas of Queensland, the report cites.

Some insurers are covering areas considered disaster prone at a loss. Ironically these are sometimes desirable coastal regions that attract a concentration of wealth and population. Historically insurers have spread extreme weather risks across broad populations and extended time frames, but even with this model insurers have paid out $1.40 for every $1 they receive in premiums for some North Queensland properties, the Australian Financial Review reports.

How climate change challenges are affecting insurance premiums and availability

These impacts create a number of profitability challenges for insurers. The unpredictability of extreme weather events or natural disasters forces them to maintain higher capital reserves and also affects their ability to invest funds raised through premiums to maximise returns and meet capital reserve requirements. To compensate, insurers transfer a percentage of their exposure to external parties such as reinsurers which, in turn, are raising reinsurance premiums to offset their weather related losses.

Maintaining capital reserves, reducing capital available for investment and purchasing reinsurance all impose additional costs on insurers. These costs are passed on to consumers who in response reduce their insurance cover to preserve their costs or because the insurance is unaffordable, exacerbating the situation.

The role of mitigation strategies in business and government policy

For insurers responsibility for climate change preparedness may involve another associated issue: the potential for legal actions, either directly or through policies such as directors and officers' liability and public liability, based on perceived failures to sufficiently take climate change into consideration.

Governments also have a role to play through mitigation activities such as backing engineering solutions to weather-related threats, providing incentives for protective adaptations to properties and subsidising insurance for otherwise uninsurable properties.

Other actions include legislation for a Federal Government funded cyclone and flood damage reinsurance pool which is claimed will reduce insurance premiums by up to $2.9 billion collectively for eligible household, strata and small business insurance policies. Homeowners in northern Australia may benefit from up to 46% premium discounts, strata properties up to 58% and SMEs up to 34%, Insurance News reports.

The Insurance Council of Australia has called for all Australian governments to double federal funding to $200 million yearly up to $2 billion, and advised steps for making buildings in at risk areas more resilient to floods, cyclone, and bushfires. Adoption of this proposed outline could save billions over the next 30 years, Insurance Business Australia reports.

How Gallagher can help

As a brokerage and risk management advisor seeking to work with the unfolding challenges of property insurance and climate risks that are potentially no longer location specific, our Gallagher business property experts are aware of the complexity of the issues involved and will endeavour to provide guidance to clients wanting to position themselves positively in terms of their exposures.

Businesses with proximity to potential weather impacts, such as water courses in flood prone areas, may be able to access hazard data and analysis to assist with understanding risks and exposures better via Gallagher expertise and industry services.

Disclaimer

Gallagher provides insurance, risk management and benefits consulting services for clients in response to both known and unknown risk exposures. When providing analysis and recommendations regarding potential insurance coverage, potential claims and/or operational strategy in response to national emergencies (including health crises), we do so from an insurance and/or risk management perspective, and offer broad information about risk mitigation, loss control strategy and potential claim exposures. We have prepared this commentary and other news alerts for general information purposes only and the material is not intended to be, nor should it be interpreted as, legal or client-specific risk management advice. General insurance descriptions contained herein do not include complete insurance policy definitions, terms and/or conditions, and should not be relied on for coverage interpretation. The information may not include current governmental or insurance developments, is provided without knowledge of the individual recipient's industry or specific business or coverage circumstances, and in no way reflects or promises to provide insurance coverage outcomes that only insurance carriers' control.

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