As we head into the Australian summer, we’re already being warned about the ‘higher than normal risk’ of bushfires and an ‘above-average’ cyclone season. It’s time to prepare clients for this by ensuring they are reducing their risks and that they have the appropriate cover.
More bushfires, heavier floods, fiercer cyclones. The Australian insurance landscape has its work cut for it in the coming decades to keep premiums in high-risk areas affordable.
The annual cost of natural disasters is tipped to triple to $33 billion by 2050, according to a Deloitte paper; while the CSIRO and Bureau of Meteorology’s State of the Climate 2016 report paints an equally sobering outlook.
We should do more to share the positive stories which emerge as communities rally together to fight, support and survive.
The CSIRO report states climate change will cause more extreme rainfall events across most of Australia, harsher fire weather in southern and eastern Australia, and more intense (albeit fewer) tropical cyclones.
Adding another layer of difficulty, a Lloyd’s report, “Catastrophe Modelling and Climate Change”, reminds us that just because we can predict an increase, doesn’t mean we can predict when and where disaster will strike.
“Uncertainties associated with the estimation of the extent and frequency of the most extreme events means that the climate change impact can be difficult to account for in risk models,” that report says.
Karl Sullivan, the Insurance Council of Australia’s General Manager of Risk and Disaster Planning, is confident the risk-based pricing model remains entirely sustainable into the future, even if predictions about costly natural disasters come true.
But he concedes that premiums may remain expensive for certain policy holders.
“Although predicted costs will be shared over an increased number of policy holders due to population expansion, it is likely that individual policy holders will still face higher premiums in accordance with the greater financial risk insurers are being asked to take on,” Sullivan says.
Case study: Attack of the drones
“Policy holders can take steps to reduce their premiums, such as paying a higher excess or bundling several policies with one insurer. However, the most important step in lowering premiums is reducing risk through mitigation and resilience measures.”
Unsurprisingly, risk-based pricing isn’t favoured by those in disaster prone areas, says experienced far north Queensland broker, Karen Hardy, from Acme Insurance Brokers Tully.
She says these areas are facing a serious AAA issue – availability, affordability and adequacy.
“By all reports, natural disasters are on the increase globally. Regretfully, insurers tend to be reactive to natural disasters rather than proactive,” she says.
“They withdraw supply as demand increases, diminishing availability and further compounding the issue by becoming unaffordable quite quickly. This in turn erodes adequacy as consumers struggle to maintain appropriate levels of cover within budget.”
Hardy insists the current model is no longer sustainable, nor acceptable, for industry participants and consumers.
“Regional Australia is tired of hearing ‘it’s all about population’. We too are part of that population,” she says.
“As natural disasters increase, major cities will suffer increasingly large losses that will be compounded by population density, not reduced by it.”
Challenges facing insurers
The most pressing challenge facing any insurer, year in, year out, is the possibility of a severe disaster season, says Sullivan. And if you thought last summer was bad, this one isn’t looking much better.
“BoM has forecast above-average cyclone activity and the Bushfire and Natural Hazards Cooperative Research Centre has identified elevated bushfire risks across large swathes of southern Australia, especially New South Wales and Victoria,” Sullivan says.
Processing natural disaster claims in a timely manner is also becoming increasingly important, says Jon Winsbury, Executive Vice President of third party claims administrator Gallagher Bassett International.
“Demands from customers are through the roof, particularly in areas where customers aren’t used to it,” Winsbury says.
“The challenge is continued investment in systems that make it simple for insurers to manage first notification loss, assess the claim, and get payments out quickly.”
Opportunities and technologies
But it’s not all doom and gloom. For every challenge, there’s a solution in the works to speed up processes or drive costs down.
“Technology is enabling us to do things now that we simply couldn’t do even five years ago,” says Darren Trott, National Business Development Manager at Crawford & Company which specialises in a range of claims management services.
“The main example I would use here is the Crawford Drone (see case study),” he says.
How to: TALK TO CLIENTS ABOUT NATURAL DISASTER INSURANCE POLICY
Abbie Wilson, broker at Reliance Partners, Horsham, Victoria, adds that technology is also speeding up information transmission during catastrophes.
“The devastation caused by Hurricane Sandy in the US demonstrated how people are turning to social media platforms to gather news and communicate. Twenty million Sandy-related posts were sent (via Twitter) at the storm’s peak, even though reception was down,” she says.
And it’s not just customers who can make the most of phone apps, insurers can also use the technology to manage expectations.
“Customers can be proactively updated about what’s happening with their claim by receiving push alerts,” Trott says.
Another area where industry and government can make use of technology is around weather pattern prediction.
“When a weather pattern comes in, everyone is looking at their app to see how bad the storm is, and whether they should get their cars undercover,” says Winsbury.
“That’s helping the industry as the government is able to respond quickly through many different forms of media to get the message out.”
The role of government
This leads us to the somewhat contentious issue of what role government should play in natural disaster insurance.
ICA’s Sullivan believes government can assist by investing in permanent, well-maintained mitigation, strengthening building standards and enforcing appropriate land development.
“State governments could also assist households take out more insurance cover by removing inefficient stamp duties that add about 10 per cent to household premiums,” he adds.
Winsbury believes government should be kept away from setting premiums so the market can do its thing.
The most important step in lowering premiums is reducing risk through mitigation and resilience measures.
He concedes, however, that government has a role to play in ensuring coverage is fair and reasonable. “For example, that big 2011 debate in Queensland where you had the flood versus rising water argument,” Winsbury says.
FNQ broker Hardy on the other hand wouldn’t mind seeing government intervene to help keep premiums down.
She wants to see a legislated national building code that ensures anything built within 150km of the coast is constructed to category five standards, with minimum standards reducing as you move inland.
She’d also like premium increases capped at 5 per cent a year and 30 per cent every decade.
“This will create certainty on both sides of the supply and demand chain,” Hardy says.
By and large, most in the industry agree we need a more concerted effort to ensure insurers aren’t always painted as the bad guy post-catastrophe.
“Insurers didn’t cause the event, they’re here to help people recover from it,” Trott says.
“I’m not pointing a finger at the mainstream media. What I’m saying is as an industry we need to get good news stories out there.”
Sullivan adds: “Raising community understanding of natural disasters is… integral to combating misunderstandings and unrealistic expectations that underpin many of the industry’s reputational challenges.”
This is where brokers can have an enormous impact, says Sullivan, as they’re ideally placed to boost awareness about natural hazards and appropriate insurances.
For example, Reliance Partners’ Wilson consistently educates her community through social media articles.
“We should do more to share the positive stories which emerge as communities rally together to fight, support and survive.”