Insurance and Climate Change

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Insurance and Climate Change
An Australasian Perspective
Tony Coleman Chief Risk Officer Group
Actuary Insurance Australia Group
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Global temperatures have increased. 1990s the
warmest decade. 1998, 2001 and 2002 were the
warmest years since records began. Further
increases are projected Climate Change is here
and now !
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Weather and Climateare Core Business for Insurers

• Insurers calculate, price and spread risk across
  the community
• Claims paid represent largest cost of an insurer
  (claims 80 of home and motor premiums)
• If frequency or severity of claims increases
  insurers have to increase premiums or mitigate
  risk to stay viable
• Climate change is expected to increase the
  frequency and/or severity of claims incurred

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New Zealands top insurance losses since 1968
(ICNZ)

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Features of NZ Top Insurance Losses

• Other than the 1 Earthquake and 1 major power
  failure, weather-related losses make up remainder
  of top events
• Flooding events dominate
• Cyclones and Weather Bombs are key weather
  systems
• Thames/Coromandel area has experienced more than
  10 flooding events since 1981
• All of these weather-related phenomena are
  expected to increase in intensity and/or frequency

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The April 1999 Hailstorm caused the highest
insurance loss from natural disasters in Australia
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Cyclones, Bushfires and Floods are also important

• Historical Insurance Losses
• 1974 Cyclone Tracy 837m
• 1974 Cyclone Wanda 328m
• 2003 Canberra Bushfires 350m
• 1983 Ash Wednesday fires 324m
• 1984 Sydney floods 132m
• All of these phenomena are expected to increase
  in intensity and/or frequency

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Early Signs of Global Warming !

• 3 of the worst hailstorms in Australias history
  occurred since 1990
• 3 of the most intense Cyclones ever recorded in
  Australasia occurred in the last decade
• TC Gwenda - 4/1999 WA - pressure 900hPa
• TC Inigo 4/2003 WA - pressure 900hPa winds
  320km/h (est)
• TC Olivia 4/1996 WA - pressure 905hPa
• Cyclone Zoe which hit the Soloman Islands in
  3/2003 may be most intense ever for that region

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Early Signs of Global Warming (cont) Cyclone -
March 2001

• Most southern forming cyclone but not
  officially recognised by Bureau of Meteorology
• Caused major flooding from Hunter to SE QLD 700
  km of coastline
• 139 km/hr recorded
• 62 Million damage (underestimates true cost due
  to lack of flood insurance)

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Small changes in mean climate can increase
damages dramatically
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Hail Storms Doubling hail diameter 10-fold
increase in kinetic energy
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Floods Number of Buildings affected by flood and
the associated costs increases dramatically as
return period decreases
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Small increases in wind speed can significantly
increase losses (NSW, NRMA Building Insurance
only)
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21/1/1991
Many people and properties at risk
14/4/1999
18/3/1990
28/10/1995
3/10/1986
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How will hailstorms be affected by climate
change?

• What are the implications under various Climate
  Change scenarios?
• Very little research in this area at present
• Climate Change means that historical records
  become less relevant
• Modelling and our capacity to predict become
  extremely important

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IAGs Storm Modelling Climate Change

• This modelling is on the cutting edge using
  state of the art models and technical expertise
• Initial analysis based on the April 1999 event
• How much larger or more intense is possible ?
• How will their characteristics and behaviour
  change?
• How much more likely are they to occur ?
• The answers were surprising!

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Area Affected by 8 cm hail
60 Km
Possible Storm
April 1999 Storm
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How could this happen?

• Produced by very small changes to three key
  parameters
• Wind-shear
• Sea surface temperature
• Atmospheric stability
• Of these, sea surface temperature is absolutely
  related to climate change, and the other two are
  believed to be related
• This is a good example of how small changes in
  climate can have dramatic impacts

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IAG Climate Change Research

• Historical records unreliable guide to the future
• Designed to target climate change impacts to
  Australasian region
• Cyclones
• Weather Bombs
• Hailstorms
• Other wind and rainstorms
• World-leading modelling
• Investigate trends in extreme events over the
  1990-2050 period and impacts of increasing CO2
  concentrations

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The IAG-NIWA-Environment Waikato Joint Proposal

• Better understanding of flood risk
• Incorporate Climate Change scenarios
• Develop an engineering solution
• More available and affordable insurance
• Improved local economies
• Increased community awareness
• A good example of how all stakeholders must work
  together to create more sustainable communities

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Economic losses from natural disasters greater
than 10Million are increasing in Australia
Source Bureau Transport Economics analysis of
Emergency Management Australia Note Definition
of Natural Disaster Economic costs greater than
10Million (1999 prices) (Includes costs of
deaths and injuries)
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Global Connections

• Climate Change is a global phenomena
• The insurance industry is inter-connected
  globally via reinsurance
• The price of insurance is in part determined by
  global dynamics
• Major weather events in North America and Europe
  (hurricanes/floods) will impact on the
  affordability of insurance in Australia
• The economic impacts of Climate Change do not
  stop at national borders

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Number of global disasters are increasing
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Costs of global disasters is increasing
Economic losses doubling every 10 years
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How can we reduce Climate Change Impacts?

• Mitigation global scale
• Requires whole-of-economy and international
  action
• Adaptation local scale
• Requires cooperation between all stakeholders
  e.g. NSW flood summit, Thames/Coromandel flood
  project

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IAGs Response

• Proactive at a policy level, we support any
  initiatives that reduce greenhouse emissions
• Corporate ecology
• Corporate energy efficiency initiatives
• Procurement policies
• Research
• Weather related risks and climate change
• New products and services which create business
  value and encourage sustainable behaviour

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Summary

• Our core business is directly connected to
  weather and climate and changes to it
• Small changes in parameters can increase damages
  dramatically
• Because we insure the risk, insurance is the
  barometer of the impact of Climate Change on the
  economy
• Whole-of-economy and international action is
  required