Rising climate disaster costs drive up insurance prices. What you need to know.

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Rising climate disaster costs are reshaping the insurance landscape, urging businesses to fortify their resilience. With climate related events surging, insurance payouts have doubled since 2017. Australia and New Zealand face escalating challenges, prompting a call for businesses to bolster climate risk preparedness. The Insurance Council of New Zealand reports $3.5 billion in insured damages in 2023 alone. As insurers grapple with uncertainty, partnering with adept brokers equipped with scientific tools becomes crucial for informed decision-making and navigating the evolving insurance market.

The cost of climate related disasters highlights the critical need for businesses to enhance their resilience against climate risks.

The insurance industry has been heavily impacted by several recent extreme weather events fuelled by climate change. Natural disasters like floods, hurricanes, wildfires and droughts have led to a surge in insurance payouts, averaging USD$110 billion annually since 2017, more than double the average of USD$52 billion over the preceding five-year period.

Extreme weather events are also worsening across Australia and New Zealand. Since the Black Summer bushfires in Australia that burnt an estimated 24.3 million hectares and destroyed over 3,000 buildings in the summer of 2019-20, there have been 11 declared insurance catastrophes resulting in more than $13 billion in claims.

New Zealand has also recently endured more than its fair share of natural disasters. According to the Insurance Council of New Zealand (ICNZ), there have been more than 40 natural disaster events in NZ since 2019, headlined by Cyclone Gabrielle and the Auckland Anniversary floods in early 2023.

A recent report by the NZIER (New Zealand Institute of Economic Research) revealed that the insured damages from climate related disasters in 2023 alone reached an estimated $3.5 billion, with close to 120,000 claims. The same report stated that a further $2.3 billion in losses went uninsured.

A survey completed by PwC (in collaboration with the Centre for the Study of Financial Innovation) in late 2023 also identified climate change as the most significant risk facing reinsurers as they continue to bear the brunt of catastrophe claim costs.

The alarming frequency and severity of climate-related disasters highlight the critical need for businesses to enhance their resilience against the physical and operational risks resulting from climate risks. However, effective preparation is contingent on having access to the right information. Without this, the effectiveness of any risk resilience initiative can be called into question.

This underlines the important role that your insurance broker can play in cushioning the consequences of natural disasters. Several leading brokers in the market have developed, or have access to, a range of scientific tools and resources that can help organisations explore, quantity, and manage their climate related exposures. Examples include natural catastrophe modelling and loss scenario testing, physical risk engineering assessments, assistance with regulatory reporting, and developing climate change risk frameworks.

These services not only help organisations make more informed decisions around climate risk, but they also put organisations in a better position to manage the adverse effects of climate change on the insurance market.

With climate change driving new extreme weather records, it is becoming increasingly difficult for insurers to measure, predict and apportion risks effectively. Insurers have historically used models to hedge risks that were not designed to predict uncertain events, such as natural disasters that may be exacerbated by climate change.

Anil Vasagiri, head of property solutions at Swiss Re Reinsurance Solutions, said: “Natural catastrophe risk assessment that is traditionally rooted in the past will be highly inadequate to measure or quantify the likely impact of climate change”.

This leaves insurers overexposed to climate risk and needing to adopt corrective measures to manage their portfolios better. Many industry experts are concerned that insurers will continue to scale down cover or withdraw their support altogether for businesses in disaster-prone areas.

For example, Vero recently publicised their intentions to impose further changes under their property policies for New Zealand businesses in high-risk zones, including higher excesses for flood claims, limits or exclusions on flood cover, and higher premiums.

The pressure on companies to act on climate change continues to increase, with disclosure regulations encouraging companies to address climate-related risks proactively. Partnering with an insurance broker with the expertise and resources necessary to help manage such risks is an important consideration that all businesses should investigate.

As one of Australasia’s leading insurance consultancy groups, we have helped more than 200 organisations test the insurance broker market to ensure they are partnered with the most fitting broker – one that has the experience, knowledge, market relationships and technical proficiency to deliver the best solutions. Contact us to find out more.

Also read: How to choose the right insurance broker to maximise success.

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