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How climate change is affecting your clients premiums

Climate change is an undeniable reality that continues to shape and reshape our world, affecting various aspects of our daily lives. In Australia, one of the areas feeling the profound effects of climate change is the insurance industry. As extreme weather events become more frequent and severe, insurance companies are forced to re-evaluate their risk assessments, leading to an inevitable impact on premiums for policyholders.

Rising Frequency and Severity of Natural Disasters

Australia has long been familiar with natural disasters such as bushfires, floods, cyclones, and storms. However, the intensification and increased frequency of these events are closely linked to climate change. The changing climate patterns have led to longer and more severe fire seasons, heavier rainfall resulting in widespread flooding, and more intense tropical cyclones. These changes pose a significant challenge for insurance companies, as the risks associated with these events become more unpredictable.

Essentially, some insurers may take the view that they can increase their return on investment by withdrawing some or all of their capital from affected locations to unaffected locations. Over the last few years we have already seen a reduction in capacity or appetite of insurers to write in areas affected by extreme weather events. It remains to be seen if capacity and appetite will return over time, but even if it does, it seems likely that the insurers will be more agile in adjusting their premiums and reviewing them more regularly.

Increased Payouts and Losses

The escalation of natural disasters has translated into higher claims payouts for insurance companies. The devastating impact of events like the Black Summer bushfires, which ravaged large parts of the country, and the severe flooding in various regions, has resulted in substantial financial losses for insurers. As a consequence, insurance companies are compelled to adjust their premiums to ensure they can meet their financial obligations to policyholders while remaining economically viable.

Changing Risk Profiles

The traditional models used by insurance companies to assess risk are becoming outdated as climate change alters the landscape of environmental risks. Areas that were once considered low-risk may now be prone to more frequent and severe weather events. This shift in risk profiles forces insurance companies to reassess their underwriting practices, leading to adjustments in premiums to accurately reflect the heightened risks associated with climate change.

Regulatory Responses and Market Dynamics

In response to the growing impact of climate change on insurance, regulators in Australia are actively engaging with the industry to develop new frameworks and guidelines. Insurers are increasingly required to consider climate-related risks in their business models, and this regulatory pressure is likely to influence premium adjustments. Additionally, the evolving landscape of climate-conscious consumers is shaping market dynamics, with a growing demand for sustainable and climate-resilient insurance products.

Mitigating Climate Risk and Premium Impact

Insurance companies are not only adjusting premiums but are also exploring innovative ways to mitigate climate risk. This includes investing in technologies for more accurate risk modeling, promoting sustainable practices among policyholders, and developing new insurance products tailored to address the challenges posed by climate change. These efforts aim to strike a balance between providing coverage to policyholders and ensuring the long-term sustainability of the insurance industry.

As climate change continues to reshape the world, its impact on insurance premiums in Australia is undeniable. The increased frequency and severity of natural disasters, changing risk profiles, regulatory responses, and market dynamics are all contributing factors. While adjusting premiums is a necessary step for insurers to remain financially viable, it is crucial for the industry to adopt sustainable and innovative strategies to navigate the challenges posed by climate change. As insurers and policymakers work collaboratively, it is hoped that a resilient and adaptive insurance sector will emerge, capable of providing effective coverage in a rapidly changing climate.

Mick O’Bree
General Manager of Operations & Underwriting
Follow me on LinkedIn

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