Affordability of Insurance (part 2)
Scott Hawkins
Executive Leader | Reinsurance & Insurance Specialist | Skilled at driving sustained value creation through long-term partnerships
The affordability of insurance continues to be a hot and complex topic. And it’s something I care deeply about. Why? Because I believe insurance means much more than simply adding on another expense. It’s a vehicle that can help people rebuild their homes and lives after devastating events. Without insurance it is much harder, for some nigh-on impossible, to do this.
There are different angles that can be taken on this topic and often, in the insurance industry at least, both affordability and climate change are addressed together. And understandably so. In my first article entitled Extreme weather events = insurance becoming even more expensive? I expanded on the impact that extreme weather events has on insurance affordability and the importance of mitigation and resilience.
In this second part I will delve into the shorter- and longer-term view. What are the driving pressures and trends, and what is the ultimate goal?
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Short term pressures driven by 3 main factors
1.????Rising Inflation means the current inflationary environment has impacted the cost of repairing and rebuilding damaged assets. And not just from Natural Catastrophe events but all claims. Constraints in supply chains as we emerge from the pandemic, plus a war in Europe, have also played a role.
2.????Rising interest rates have impacted the cost of capital as investors look to increase returns. This puts increased pressure on the profits required by companies to compete for this capital.
3.????Increasing frequency and severity of extreme weather events are effects of climate change, and remains a consistent pressure. Three consecutive La Ni?a’s were major drivers of the increase in events like Flood, Storm and Hail across Australia and New Zealand, which we’ve experienced to devastating effect over the past five years.
There are no real surprises here. So, what should our attention be focused on in the short-term? The short answer – it’s actually the long term we should be focused on. Why? Because that is what will drive a real and sustainable change in affordability. We need to recognise that short term pressures like rising inflation and the current La Nina will normalise, but the effects of the changing climate will not.
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Looking back, on a global scale the 12022 natural disaster losses were US$270bn (AUD$405bn). Only 44% of those losses were insured. And if we consider just 2flood losses, globally from 2018-2022 the figure was a staggering US$300bn. Only 15% of those global losses were insured. Locally, 12022 saw Australia’s costliest floods in its history with overall losses of AUD$12.2bn. Only AUD$7.5bn of those losses were insured.
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In a local context, we need to identify who our most at risk and vulnerable communities are, and understand their urgent remediation needs. This is where the government can play a vital role. In the recent budget the Treasurer confirmed 3“$200million [a year] would be invested in helping communities strengthen preparedness for more frequent and severe natural disasters”. The Disaster Ready Fund (DRF) is a five-year investment, and a lever that can help relieve the cost of insurance. The 4Insurance Council of Australia (ICA) is lobbying for this to be extended to a 10-year rolling program.
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And whilst these short-term factors are creating a strain on finances there are longer term and potentially far worst pressures to come. I firmly believe we need to increase our efforts on being future focused.
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Long term pressures, driven by trends such as…
1.????Future effects off climate change will have a far greater impact on the affordability of insurance.
2.????Building with wrong materials in the wrong areas which needs to be addressed as a priority.
3.????An increasing population in high risk areas means a larger number of families and communities will be impacted.
The increase in frequency and severity of many natural perils will be seen across Australia and in many areas which are currently not exposed. 5Current Munich Re data shows that bushfires with hot and dry conditions, like the “black summer” fires of 2019/20, are now four times more likely than in pre-industrial times. The ICA report that 6“over the last 10 years the average annual household cost of extreme weather has been $888, but that this figure is expected to jump to more than $2,500 a year by 2050.”
Looking ahead, today’s building standards are unlikely to be fit-for-purpose. We need to ensure our current mitigation efforts are built into our future planning. 7The Australian Bureau of Statistics (ABS) forecast that Australia’s population will increase to 29.5 million by 2029. Over the last decade ? of Australia’s growth has been centred on the big capital cities, namely Melbourne, Sydney and South-East Queensland. Areas known to be devastated by fires and floods.
This reinforces the urgency to act now.
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The ultimate goal
Greater insurance penetration and risk reduction remains the ultimate goal.
In a country like Australia, we now have every indication risk will continue to increase not decrease, and we need to ensure we have an environment that is durable and think about it in the longer term. As a country it is essential we have insurance products and services that are affordable for everyone.
Insurance underpins our economy, it protects the largest asset of most Australians, and gives comfort to banks and other financiers to lend for development and investment.
What can we do? We need to focus on the following key areas to reduce the impact of climate change on assets and ensure sustainable and affordable insurance products for Australians:
1.????Strategically plan where we build with a view on what the future will look like, leveraging the latest data analytics.
2.????Make our existing homes, buildings and infrastructure better prepared for the future through investment in resilience and mitigation. Essentially, 8adapting to the consequences of climate change.
3.????Ensure that we keep adequate risk signals through knowledge of what the true cost of claims are likely to be for a home or building.
4.????Create mechanisms to support an increase in insurance penetration for the most vulnerable. Where subsidised schemes are established to assist insurance affordability, make sure they can actually help the most at risk to enter the insurance system.
5.????The insurance industry, together with government, the construction industry, and private corporations, need to work together to create the required change in areas such as policy, urban planning, construction and regulatory decisions.
Final thoughts…
We need to keep challenging what is being done now and what needs to be in the future to manage, mitigate and build resilience. Tenacity is vital.
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Ultimately, we need as many individuals, families and communities as possible to have some form of insurance cover in place so they have help when they need it the most.
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ICYMI – Reinsurance Rendezvous is a brand new podcast series by Munich Re Australia that explores the forces shaping today’s insurance and reinsurance market – and reveals where it’s heading tomorrow. In each episode, I’m joined by leading thinkers and change-makers to tackle the toughest questions that professionals face in insurance and reinsurance. Find the latest episode via this LinkedIn post, click here to listen to all episodes, or subscribe on Apple Podcasts, Spotify or your favourite podcast platform.
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1Climate change and La Nina driving losses: the natural disaster figures for 2022
2Flood risks on the rise – Greater loss prevention is needed
3‘Budget’s resilience focus a welcome start, insurers say’ Insurance News
4Budget funding for disaster resilience and early response welcomed Insurance Council of Australia
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Senior Insurance Finance Executive
1 年Great article and could not agree more