Jon Broome – London PICG conference 2023
I love a sunburnt country, A land of sweeping plains, Of ragged mountain ranges, Of drought and flooding rains, I love her far horizons, I love her jewel sea, Her beauty and her terror - The wide brown land for me. Dorothy McKellar written 1906 -excerpt – second verse
Could Australia be the quintessential study in climate change? Could we all, by looking at Australia, see our future?
The year I started Proclaim, 1999, was the year of – to that time – Australia’s biggest insurance disaster, the Sydney hail storms. For those of you who visited Sydney in that year, you may recall a sea of blue tarpaulins covering slate and tile roofing across the Sydney suburbs. That catastrophe cost over $5 billion and was considered a one in hundred year storm.
When you work in the insurance industry, you start getting used to quite regular one in hundred year storms in Australia. As Dorothy McKellar eloquently put it back in 1906, drought and floods are a repetitive cycle in Oz. I recall as a young fella a severe drought in the early 70s where there were severe water restrictions, and I distinctly remember getting the neighbours over to form a chain where we passed buckets to fill the swimming pool. So our history of drought and fire is quite the fodder for climate change deniers – in fact one of our recent Prime Ministers, Tony Abbot, remains sceptical about climate change, and he has company in conservative politics, where protecting the coal lobby is the priority.
So what is actually happening in our country, and what does the science say about it? Yes, climate change is not new, as say the naysayers, but when coupled with global warming we face a unique set of circumstances – where, to use an old phrase – life’s great truths, that start as blasphemies, are staring us in the face. If we can accept we are in midst of a potentially existential crisis, I suppose the larger question is – what are we doing about it? The premise for my appearance here today is a New York Times Daily podcast on the situation with storms in Florida, funnily enough, which is nowhere near Australia, but does share the influence of the Pacific Ocean. The strong conclusion from that NYT podcast was insurance underpins the economy – when the balance tips, and businesses and residences can no longer afford to buy insurance, or insurers are unwilling to underwrite those risks, the knock on effects are huge – construction stops, businesses can’t trade, people lose their jobs. I will explore that further in the context of our recent floods, but first I think it will be worth looking at some of our recent catastrophes to give some colour to the Australian experience.
- Flood – NSW and QLD 2022 – over $6 billion and counting
- Storm/ Hailstorms, 1999, Sydney. Claims costs today about $5.8 billion and total financial costs possibly much more.
- Black summer, 2019/20 NSW, VIC, SA and QLD. Claims costs about $5.5 billion versus total financial costs of about $10 billion.
- Tropical Cyclone Tracy, 1974, Darwin. Claims costs today about $5.3 billion versus total financial costs of about $7 billion.
- Earthquake, 1989, Newcastle. Claims costs today about $4.4 billion
Sobering reality is that in the last 5 years we have had 2 of our worst disasters – fire and flood.
It seems spikes in claims from CATs are regular now – we have had 11 Insurance Catastrophes declared since 2019. There are predictions of annual extreme weather costs of 35.2b annually by 2050 if we don’t act now to quell Climate change.
And if catastrophes don’t get you, we of course have a variety of snakes, spiders, jellyfish and sharks that can take you out as well!
For our recent fires and floods, we have had a series of related but distinct events across a vast area causing widespread damage. Let’s take a quick look at these two events to get an understanding of their origin and impact before we look at the why and the response.
Across our summer of 2019/20, we had a series of bushfires that devastated large parts of the country, largely in NSW, Victoria and South Australia.
Facts on fires
Australia had its hottest and driest year on record – ever – in 2019. Much of the area that burnt was in drought from 2017. We saw more than 19 million hectares of land burnt, more than 300 homes lost, 33 people died, mass livestock losses and devastating consequence to other wildlife including our beloved koala which is now endangered. It was estimated over a billion animals died or were displaced as a result of the fires. From an insurance perspective, we saw over 30,000 claims worth over $5bn. And according to the Insurance Council of Australia, many of those who had insurance were significantly underinsured – actual losses were estimated at double the insurance cost.
Just to give you some perspective, we had 6 million hectares burning initially that expanded ultimately over 2020 to as much as 19 million hectares of fire front, which is more than double the size of Scotland, and only 5 million hectares shot of being all of England.
Living in Australia at the time was eerie. You would leave your home with the smell of smoke hanging heavily in the air, and on some days the city was in a smoky fog. On New Year’s Eve in Victoria, where I am from, people in the beachside haven of Mallacoota were evacuated to the beach, where eventually they would be shipped out as it was too perilous to drive the 2 hours back to the city.
The city I am from, Melbourne, is famous for having 4 seasons in one day. Our weather is heavily influenced by land and water. At the height of summer, our hottest days come with a strong northerly wind. These days, it feels like you are standing in front of a fan blowing hot air at you. This wind comes off the land and generates immense heat and sometimes dust to go with it. We are also famous for our cool changes….our wind can change suddenly to a southerly, which comes off the water, and can drop the temperature by 15 to 20 degrees, pretty much instantly. You can smell a cool change coming, and there is usually a moment of calm as well as a vicious wind before it changes. While the wind changes do offer respite from the heat, they are often the enemy of firefighters as the fire direction changes.
Fire to flood
From the hottest year on record, we bounce to a wet period, and in 2022, we see the worst floods in our history. The area affected was some 1000kms in length – to give that some context that is about the same distance from the top of Scotland to the bottom of England. It is twice as wide as the widest area of the United Kingdom. While initially the floods impacted large areas of Queensland and NSW, Victoria would also suffer severe flooding later, and we have just seen our Kiwi neighbours also suffer devastating rain and floods.
So how much rain was there? In some parts of Brisbane they received a year’s rainfall in a few days.
Brisbane received 676 mm in 3 days to 28 February, more than the average annual rainfall of Melbourne (650Mm) or London (585mm). If you were lucky enough to live in the well named Mt Glorious, a suburb of Brisbane, you got 3 times London’s annual rainfall in a week.
The flood bomb of 2022 saw 22 lives lost, over $6bn in insured losses, over 200,000 insurance claims with 72% of claims being domestic and 28% commercial by value, although business clam numbers by volume were closer to 10%. The two hardest hit areas were Brisbane in Queensland, and Lismore in NSW. The average claim in the more heavily populated area of Brisbane was around $30,000 whilst in Lismore it was almost $80,000. It is fair to say that the scale of damage and the devastating consequences were much more obvious in Lismore. In fact, many of the larger issues arising from climate change and the floods can’t be better expressed than through Lismore, so we will talk a bit about that shortly. First, some background on claims. And then some science, because we know underwriters are scientific types.
From an insurance perspective, the claims peak for the floods came at a difficult time, with a tight labour market making it difficult to ramp up resources to respond. There was a significant increase in complaint numbers to AFCA in the year and over 2,000 related to flooding, with more than a third complaining about delays. The other two thirds were roughly spit between application of policy exclusions and quantum/ under insurance.
It isn’t surprising exclusions are a fertile area of dispute as traditionally insurers in Australia exclude flood, but the definition of flood is confined generally to escape of water from a watercourse. So you can be covered if the water that flooded your home was caused by natural runoff or back up of stormwater drains. How can you tell the difference? That is where hydrologists come in…..but they don’t always share the same view, so it can get tricky! In some commercial claims it is made easier by an insured purchasing flood cover …in our case we had a number of claims advanced of which the majority, on their face, seemed excluded, until you looked more closely. Example: we had one insured take pictures of their flooded factory on time lapse and contrasted it with the river breaking its banks. Covered. In many cases, land adjoining a river, clams were still advanced, more in hope, and in some of those cases we still need to get a hydrologist report at cost of 5-8k. Having brokers advance claims that aren’t covered adds to a clogged pipeline and stretched resources.
While the labour market wasn’t as tight back in 2019 with bushfires, insurers again found themselves under fire, pardon the pun, largely for claims handling. Problems arose with communication – setting clear expectations – with speed of service, delays again being a major issue – and speed and amounts of settlements. The major problem with both flood and fire cats is finding a builder and getting reliable quotes. People were cash settling on quotes where builders could not actually do the work then finding the actual costs of reinstatement were significantly higher. One of the suggestions arising from the bushfires was for insurers to be more flexible to assist consumers who do not want to rebuild in high risk areas to relocate, for example, rebuilding elsewhere for the same sum insured. More on that later.
Ok, now some science. Australia’s climate has over recent years been heavily influenced by la Nina and El Nino. El Nino produced the conditions for drought and bushfire in 2019. La Nina has for the last three years been raining on our parade, causing high rainfall and storm events. Let me try and dumb these phenomenon down. They are driven by conditions in the Pacific Ocean. Normally we have trade winds that blow warm water from South America to Asia. To replace the warm water, cold water rises. El Nino and La Nina break these conditions. In El Nino, trade winds weaken, warmer waters are pushed back east and we generally see warmer Pacific waters, causing dryer and warmer climates for us (but increased flooding and storm risk in US Gulf Coast). La Nina – or little girl –is more of a cold event. We tend to get cooler conditions and a lot more rain, whilst US gets a more severe hurricane season but strange winter temperatures more severe in north and milder and drier in south.
It doesn’t take a scientist to notice the weather is getting slightly crazy. We have just had our third la Nina year in a row….which last occurred in 73-76 and again from 1998. The question for scientists is whether there is a link between these strange weather events, La Nina and El Nino, and climate change. Will we have less of that neutral phase between weather events?
According to the latest research, by 2030 climate change will have unambiguously altered the ocean temperatures to the point there will be more El Nino…so more drought for us …but it also leads to more subsequent La Nina’s…more heavy rain and flooding. So – what they are saying is more regular repeats of the adverse weather cycle. While there seem many who doubt the science, including past Prime Ministers, if you boil it down, we know the temperature of the ocean impacts the weather, there seems strong evidence the temperature of the ocean is rising, and one doesn’t need to be a scientist to know that doesn’t sound ideal. (Source = Commonwealth Scientific and Industrial Research Organisation)
It is suggested Australia will leave our La Nina phase and enter a new El Nino phase shortly…..so our next phase would seem to promise warmer weather, potential drought, and bushfires.
Which brings us to the question, what the hell are we all going to do about this? Will it be wise to live through droughts in heavily wooded bushfire prone areas? What about all those coastal areas that are seeing wild storms and rising seas? Is living there sustainable? And inland valleys on rivers, not so idyllic?
I don’t think it is the role of insurers to be front seat on this – we can certainly disincentives people through higher premiums, but many people buying in flood or fire prone areas aren’t buying insurance. So we need to look at the various stakeholders and try and make some sense of this. If we take as a sound principle that insurance underpins the wider economy that does influence the interaction between the various key groups in any community. Lismore is a great example of an area where part of the town is frankly uninsurable and needs thought on future sustainability.
Let’s look at Lismore.
Lismore is a picturesque town in Northern NSW, not far from Byron Bay. It sits in a valley at the confluence of two rivers. It has four main streets – pubs, clubs, industry and commerce. Fair to say it is a poster boy for the devastating consequence of the floods of 2022. Two major floods in space of weeks to be precise.
Lismore as a town was planned in 1856 on a former cattle station that was later considered unsuitable for farming due to flooding. Not a good start for planning a town. Lismore was always aware of the flood risk with measures such as flood proof construction, raised dwellings, pumps and levees. Whilst that seemed to largely work, the recent 2022 floods devastated the area to the point there are many who think the town needs to be relocated. The spectre of climate change is such that many who lived through the current event have had enough.
This excerpt from insurancenews.com.au
Michael Wood is a floodplain management expert who carried out due diligence before purchasing his property in East Lismore.
“Our floor level was 2m above the one-in-100-year flood,” he tells Insurance News. “The property was going up a hill, it was on red volcanic soil, so we bought it.
“Lismore has been through quite a few floods and risk maps showed they didn’t go anywhere near our place. We’d done our homework.”
But this flood didn’t follow any rules. Michael ended up with almost a metre of water in his house, “which is enough to ruin everything”.
“My friends say, ‘you work in flood mitigation and you bought a house and it flooded?’ Yes, I can see that. But nothing could prepare you for this flood.”
Can you relocate a large town like Lismore, population around 27,000? You can move residents to higher ground but what about businesses and large scale industrial and civic buildings? Could you regenerate the existing town for some kind of agriculture and food compatible activities, whilst relocating? Then there are transport links, access to services, energy, water etc. And if you do relocate, how much do you save in emergency assistance services and funding in future?
Who are the stakeholders?
Residents / community – those living there, those wanting to live there.
Businesses – from your café to your service station to your larger manufacturer
Government – Federal, State and local
Insurance – both underwriters and their industry groups
These are the 4 key groups we will look at, but arguably the community is far wider and more complex in its reach. Let’s try and keep it simpler so we can cover the issues in a more concise way.
This is all complicated by one of the key stakeholders in the question of sustainability – let’s call it the human condition. We forget. Already in Lismore – an area where parts of the town have had 3 floods in months, and probably should be condemned – people are buying houses on the basis they are cheap. So I suppose one of the questions is how do we save people from themselves….is that the role of the government? Or do we respect peoples’ sense of place….there is a classic Australian movie called the Castle, where the hero of the story refuses to yield to a buy back of his land for an airport.
“It’s not a house…it’s a home”
How can relocation work? Acquisition? Land swap? Acquisition is a little fraught when the land is uninhabitable and not worth much, unless there is some kind of retro subsidisation.
So what are the options?
There appear to be 3 main option for a more unpredictable future. The first, let market forces do their work, which is politically difficult and untenable in many ways. And given the Government is a stakeholder, it seems a difficult option. Recently in USA they have raised the issue – if you are living in an uninsurable and unsustainable area – be it in California in high fire danger area or Florida in the eye of storms – which you are on your own when it comes to emergency assistance.
In the USA they are debating the issues arising from the impacts of climate change – how do you adapt to a warming world…discourage people from buying and living in areas that are at high risk of damage? How can you influence behaviour in face of climate change risks?
Currently Government polices do not discourage risk in habitation. Fire and flood risk areas are effectively being subsidised by government whether by incentive or support services. When you fight fires or provide flood insurance – people will live there. The true cost of insurance or support is not being visited on those risky areas. Costs are spread across taxpayers. Some argue we are paying people to make bad decisions…supporting crop insurance in flood plains, or mortgages in paths of storms in USA is a prime example. Higher risk areas are often underwritten by government. Added to this issue – which clearly isn’t equitable – is that in some places like NSW taxes such as the fire service levy – which is intended to fund emergency response – is levied on insurance policies, at about 40% of total cost, and so if you are uninsured you are not contributing. In Victoria we have a more equitable system of taxing landowners. The ICA are lobbying heavily for the fire services levy situation in NSW to change, in its place should be a more equitable tax structure.
Government subsidises also pose a problem to sustainability – is the government prepared to reduce subsidies to influence behaviour and help people adapt?
As an extreme measure, the USA has raised this possibility – do you advise people in severe risk areas that their homes will not be subject to emergency services in event of a cat?
Do you move away from government guaranteed insurance pools and if insurance isn’t available…..will that discourage people from living in these areas? It’s hard to see people leaving if they can’t sell their homes, so maybe buybacks need to be considered.
There are many questions about government involvement in resilience and sustainability of communities in Australia. A big problem is we have 3 levels involved – the local government does planning, zoning and community services; State government does emergency response and infrastructure and Federal Government provides financial support for disasters and relocations. But State and Federal need to weigh competing priorities. Do people who don’t have insurance have more right to relief, because they tend to get it?
So what can Government do? In terms of reaction to disasters, improved coordination on clean up between insurance and the government is key to assist in faster and safer and less costly clean up. But more important is the question of prevention or minimisation. Good data – shared with communities and insurers – can help drive better decisions.
There is no question we need better land use planning in the short to medium term. For future use of land we need to acknowledge the current issues and impact of climate change in future. We also need better building controls for resilience as well. The increased risk posed by a lack of mitigation at the planning stage and a lack of effective resilience in construction, means a higher risk rating which results in higher insurance costs for these owners and tenants. Administration of land use planning is made more difficult given its divided responsibilities through all levels of government and the crucial role of often under resourced and finically stretched local governments.
If market forces is unpalatable for government, what are the other options?
Well the second option is Buyback (quoting Rhelm report, commissioned by IAG that focused on buyback or relocation)
Buyback is a simple purchase of property at risk –but comes without any relocation assistance.
A key element remains some choice – not necessarily to avoid relocation but to have options that make relocation attractive….like a sense of place, community and availability of affordable insurance. Ideally to higher ground locally.
Any relocation needs careful thought on impacts on community and those directly and indirectly affected …trade, business and those who remain and are left behind – do they get the benefit of emergency response?
Schemes can have varying levels of voluntariness- from voluntary to compulsory and triggers or schemes in-between. Fully compulsory tends to have little support, and experience tends to swing towards schemes that have choice. Schemes also work best shortly after an event, but this is difficult to achieve…requires agility in planning and government support. The speed that is required means buyback is more feasible than relocation.
One of the motivations for buybacks is savings generated by emergency response and hazard risk management. In an analysis of costs the Rhelm report found the buyback was less costly than community relocation –and less complex – and where flood risk and potential damage was high, an analysis of long term costs found both schemes could be viable.
Unfortunately, in Lismore, many of these properties that were flood damaged are now cheaper to buy or rent because of this risk, and some are home to those who are least able to afford adequate insurance, compounding the impact of a natural disaster or an extreme weather event. So what happened in Lismore?
The NSW State government has introduced the NRRC (Northern Rivers Reconstruction Corp) to manage the subdivision of land and the shift of services and communities to higher land; in terms of immediate response to homeowners they propose either buybacks (where a homeowner sells their land), home raising (to fund the raising of homes above flood levels) or retrofitting to improve resilience. We are talking 2000 homes in the red zone, most in Lismore.
Currently this is a voluntary scheme, so there is still scope for people taking on risks that frankly should not be taken on. $800m has been set aside and some of that will go to acquisition of land that people can access to build new homes. Buybacks will be at pre flood prices (if you were resident prior). For individual residents, if you had insurance you may be in a good position to rebuild after a land swap. If you were uninsured, you start with a new block, but you may not have the funds to build. Many of the Lismore residents are in this position – they feel like they have been working all their life to end up with nothing. So a buyback is a far from perfect solution.
Third option – Community relocation – removal of those at risk plus their resettlement. This is considered a last resort, over a longer time frame, requiring community consultation and support (often missing), funding and consideration of living standards …there is also the not so little matter of how you create a sense of place? How do you persuade people to lose their sense of place? If they stay, what support will they get and for how long?
There is a model that was used by Queensland after their terrible floods of 2011. The Qld Reconstruction Authority moved part of the town of Grantham in Lockyer Valley. 111 Families moved by a land swap arrangement. Their existing homes were cleared and sold and they took part in a lottery to get a similar size plot on higher ground. But there are problems with these schemes
- Most schemes need a level of choice, an aspect of voluntariness, to succeed
- They take time, which is enemy of emergency response
- They cost a lot of money – in Lockyer, it cost $30m to fund, of which State and Federal Governments gave $9m each and the remainder was funded by the local government – which had to go into heavy debt. Most local governments can’t afford this kind of initiative.
The Rhelm report noted there was an economic payoff in longer term in savings from better land use and planning – but it is longer term, and that’s the rub.
From an insurance perspective, it’s quite complicated.
First, are insurers prepared to insure these communities at all in the face of elevated risk from climate change? If so, are they prepared to provide flood cover and if so, at what cost? Residents in flood prone areas have seen premiums rocket from 3k to 30k. It is an option for the industry to exert its influence – if a community is uninsurable, what follows?
We have seen this issue before in Northern Queensland where storm and cyclone have made much of the territory unattractive to insurers. The government response, in conjunction with insurers, was a reinsurance pool – the pool is reinsurance backed by a 10bn government guarantee – aimed to encourage insurers to participate by offering reinsurance they can’t access in market. As at early this year Allianz and Sura were the two participants but it is fair to say the market has not responded as enthusiastically as the government would like. It is also subsidising a problem, which is a problem in itself.
Parametric insurance also is a possibility where it is the event that triggers coverage rather than the level of damage. Parametric products are powered by advanced technology and based on an external index being triggered, with claims settled according to a pre-agreed scale. Natural catastrophes, such as earthquakes and floods, can be logged by smart sensors that collect and deliver data analytics to identify when pre-determined parameters are met, triggering insurance coverage. Perils such as frost, drought, flood, cyclone – in Australia early adoption is in crop cover for frost and in cyclone impacted areas based on wind speed. Loss is not required! Once the trigger threshold is reached, payment is made with no requirement for loss adjusters to attend. Parametric triggers might be a lack of rainfall over a specified period in agriculture, or storms of pre-determined wind speeds.
Insurers can impact the assessment of sustainability through risk selection and premium rating, there is no doubt, provided the industry moves in the same direction. As we saw in USA with Bank and crypto exchange collapses, not all banks are created equal, and not all insurers have the same risk appetite. Some of the less capitalised insurers tend to have more exotic risk appetites. So that is a problem in itself.
In a recent surveys some 97% of scientists believe climate change is a major threat to the world, but in some countries including the USA, Israel, UK and Australia – in a survey 5 years ago, over a third of people thought it was a minor threat or not a threat at all. (PEW research centre). It’s a worry that an ageing population is clearly not concerned about leaving the world in a better place when they leave it. It is also partly politically driven – Australia, like the US, tends to fall in line with where you sit politically, which is a shame.
If the worst fires and floods in succession don’t do it for you, it’s hard to see what can. Maybe the need to go to areas where the oceans are swallowing the land to see the impact, and maybe that explains why in Greece 90% of people think cc is a major threat. Mapping of the Queensland coast in 2050 shows a number of seaside towns under threat of extinction. Likewise, on the other side of the Pacific, Miami is likely to be wet, a lot of the time.
Across all stakeholders we need
- Acceptance of likely impact of climate change
- Emergency assistance coordination
- Land use planning/ building codes
- Prevention – better building and land use + insurance cost
- Coordination of data
- Insurance industry moving in one direction
- And …save people from themselves
The insurance industry needs to be ready on both the underwriting and claim side. I am on the claim side of the line, and while I understand how tricky it has been to recruit and retain people over the Covid and post period, the reality is we need to be better prepared for disasters. If climate change is happening – we will have more disasters. We need to create an ecosystem that works better when resources are stretched. We need
- Access to claim resources
- Bigger pool of field adjusters and experts – recruited from overseas if required
- Better way of managing building costs quotes and repairs
- Better systems or willingness to embrace outsourcing to better systems
- Competent triaging…heading towards predictive analytics
- Ability to set clearer expectations and guidelines
- Better communications on updates and status of claim
On the commercial side, we need better cooperation between broker’s insurers and claims agents or claims teams.
On the underwriting side there needs to be industry alignment on acceptable risk underwriting.
This is fertile ground for very interesting discussions ……. but what are the take aways if you are in insurance?
- Global warming is accelerating climate change
- There will be more Cats
- Move more to data driven approach
- Claim resources will be stretched as long as conventional INSURANCE is at play in these areas
- That more and more we will need to consider the future of some communities
- That the insurance industry needs to not only be part of the conversation but lead it
Churchill – now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.