Life on the West Island - Risk taking

For decades, West Islanders have insured their homes and contents against risk, usually choosing one of our nation’s huge insurance companies and paying an affordable premium to cover them for losses caused by theft, accident, flood, fire or natural disaster. But now, many are finding that premiums have skyrocketed, or worse, that their homes are “uninsurable.”

Last week, the Treasurer brought down his latest budget, promising more cost of living relief. But there was no mention of home insurance premiums. And Opposition Leader Dutton has uttered dark mumblings about breaking up large insurance companies unless they bring down their charges. It seems that both major parties are ignoring the elephant in the room. This was made plain in a sobering paper issued on the same day as the budget by Dr. Günther Thallinger, a board member of Allianz Insurance. Economic journalist Nick Felk reported:

…the insurance expert was writing about a fast-approaching and existential financial risk — one that appeared nowhere in the treasurer’s speech and will barely rate a mention in the election campaign. Thallinger’s succinct warning regards climate-related weather events and the global insurance industry. “Heat and water destroy capital,” he writes. “Flooded homes lose value.” They don’t just lose value, though; houses can become uninsurable. This has far-reaching consequences. “A house that cannot be insured cannot be mortgaged. No bank will issue loans for uninsurable property.” The insurance industry has historically managed its own disaster-related exposure, but insurers will very soon no longer be able to offer coverage for many of these risks.

The insurance industry is already shifting its business model in response to this risk by lifting premiums and declaring entire regions uninsurable. For example, large American home insurers, to ensure their survival, are simply refusing to cover California over its risk of bushfires, and many companies have stopped offering new policies in Florida due to ongoing storm risk.

Falk reports that this is only the start of insurers adapting as they struggle to cover growing disaster bills. Extreme weather phenomena are driving direct physical risks not just to homes but also to land, roads, power lines, railways, ports and factories globally.

Recently, the Australian-based McKell Institute estimated the direct cost of natural disasters could reach $35 billion per year by mid-century, an average of more than $2,500 per household per year. These costs are already rising rapidly: every year since 2013 has seen more annual insured losses than the combined losses of between 2000 and 2004. As a consequence, West Island home insurance premiums rose an accumulative 56% from 2020 to 2023.

The Insurance Council of Australia says that insurance premiums in disaster-prone regions, such as the Northern Rivers region of New South Wales, have increased by up to 400% in recent years. In addition, research from the Actuaries Institute last year showed that nearly one in eight West Island households — 1.25 million people — now pay more than four weeks’ gross income on home insurance premiums.

Looking at this rapidly growing problem, The Australia Institute says that with more people exiting the insurance market, many are unable to afford to rebuild their disaster-hit homes. They estimate that families who ditch their home and contents insurance would lose three-quarters of their wealth if their home was destroyed.

This could mean that disaster-hit areas, which are already the most vulnerable, will remain unreconstructed, not just because of rising building costs but also because insurance and finance are simply not available. The World Economic Forum Global Risk Report 2024 predicts that more than half a million West Island homes will be uninsurable due to extreme weather risks by 2030.

Climate change has left much of the east coast and most of the northern areas of the continent under irreversible climate threat. And as temperatures rise and storms spread, the financial risks will mutate and multiply. This leads Thallinger to conclude that

…entire asset classes are degrading in real time, which translates to loss of value, business interruption, and market devaluation. This is a systemic risk that threatens the very foundation of the financial sector. If insurance is no longer available, other financial services become unavailable too. Real estate is the largest investment class of all, but these same pressures apply to infrastructure, transportation, agriculture and industry. Without the ability to price and manage climate risk, basic investments are impossible. The economic value of entire regions will begin to vanish. Markets will reprice, rapidly and brutally. That means no more mortgages, no new real estate development, no long-term investment, no financial stability. The financial sector as we know will cease to function. This is what a climate-driven market failure looks like.

Thallinger says there is only one a way to escape from this disaster: to move rapidly away from fossil fuels to keep emissions out of the atmosphere. Writing as an insurance executive, not an environmentalist, he says …this is not about saving the planet. This is about saving the conditions under which markets, finance, and civilization itself can continue to operate.

The impacts of climate-driven extreme weather events are already an ongoing item in federal budgets, whether through increased disaster relief or emergency services funding; the rising cost of adaptation; rebuilding and insuring infrastructure; or a growing list of other related expenditure. However, this liability has not translated into real action to reduce global emissions.

Falk reports that our domestic emissions have barely budged since 2005, while emissions from fossil fuel exports, already the third-highest in the world, are set to rise. Even a moderately responsible budget would begin by taxing fossil fuel companies properly and stopping subsidies altogether, using these funds to supercharge mitigation and adaptation measures (including to mitigate against insurance market failures).

The major West Island parties are taking no such steps. Just like homeowners quitting insurance and hoping for the best, our politicians are taking a major risk that “natural” disasters exacerbated by climate change will ruin our environment and bankrupt our country.