$4000 premiums: Flood risks to leave millions uninsured
The torrential rain sweeping NSW has been described as a “one-in-100-year” event.
It’s triggered multiple flood evacuation orders, shut schools and left some locals entirely stranded.
Now, it's been declared an insurance "catastrophe", with more than 5,000 claims filed over the weekend.
Also read: $1,000 payments for residents in flood zones
However, climate change means severe weather events like these will only increase in frequency, and state and federal government authorities need to introduce mitigation strategies, risk analysis firm Risk Frontiers general manager Andrew Gissing told Yahoo Finance.
Floods are costly: extreme weather and natural disasters between November 2019 and February 2020 cost the insurance industry $5 billion.
However, the 2007 Queensland and NSW floods cost a staggering $2.19 billion to the Australian economy alone, according to Moody’s analytics.
Floods trigger significantly greater financial and insurance risk than fires, Risk Frontiers revealed in research last year.
NSW’s Lismore and Queensland’s Bundaberg are the postcodes at greatest financial risk from floods.
The 2020 research also identified NSW’s Grafton and Windsor as at greatest financial and insurance risk from flooding.
Gissing said the current flooding highlights that this elevated risk profile remains.
“Climate change in the future will pose a strategic risk to insurance companies and also to communities,” Gissing said.
“This [NSW flooding] is really a reminder to [governments] to invest in flood mitigation. Flood mitigation saves money, saves lives and promotes insurance affordability.”
As our cities expand, the number of areas at increased flood risk is also increasing.
“We know that climate change means our atmosphere can hold more water, so we need to therefore look at having a higher frequency of extreme rainfall in future.
“And we know that we’re continuing to expand our cities too, so there are more people living in areas that are flood prone. So even though we’re looking at how to mitigate our existing risk, [we also need to] look at how we can minimise our risk through risk-based land use planning.”
Insurance catastrophe currently unfolding
The Insurance Council of Australia has received more than 5,000 insurance claims over the weekend, prompting it to declare the NSW floods an insurance catastrophe.
The declaration means the insurance industry will now prioritise affected policyholders.
"It’s too early to understand the extent of the damage to property in affected areas and to estimate the insurance damage bill, however insurers have received over 5,000 claims in the past few days," Andrew Hall CEO of the Insurance Council of Australia said.
"The insurance industry has made this Catastrophe Declaration to activate services and support for affected homeowners and businesses and reassure them that their insurer is there to help.
"As many areas are currently inaccessible due to floodwater, insurers are expecting further claims in coming days as emergency services allow residents to return to their properties to examine the extent of their damage and losses."
One-in-19 homes uninsurable by 2030
Millions of Australians could be left without insurance as increasingly frequent natural disasters place pressure on the country’s insurance system.
As many as one-in-19 homes could become uninsurable by 2030, the Australian Climate Council has warned, while the financial regulator has also flagged the growing risk.
The Australian Prudential Regulatory Authority (APRA) executive director Dr Sean Carmody told a Senate hearing earlier this month that rising insurance premiums to cover losses from climate risk are threatening the sector, and the broader economy.
While insurers will be able to pay out current claims, their ability to take on new customers in high-risk areas is diminishing.
“From our point of view in terms of thinking of the financial system as a whole, it’s not enough if insurers have the capacity to pay every claim, but there’s a shrinking number of people who can actually secure insurance,” Carmody said.
“You could extrapolate to a tiny pool where no one has an insurance policy but every claim can be paid. That might still mean there is no insolvency problem at an insurance level, but from a financial system point of view, that represents a failure.”
North Queensland a case study for insurance risk
As many as one-in-four north Queensland properties are currently uninsured as the region grapples with heightened flood risk.
Storm-inspired premiums are now three times the price of those across broader Australia after years of devastating weather events.
According to federal MP Bob Katter, this means those in risky areas are paying close to $4,000 in home insurance every year, compared to $1,500 for others.
He’s currently calling for the federal terrorism reinsurance scheme to be expanded to include state-of-emergency events like those that have devastated north Queensland.
As it stands, the terrorism reinsurance scheme is in place to provide reinsurance for business losses incurred due to terrorism incidents.
“I made it perfectly clear to the prime minister that I have strong feelings about the necessity for a reinsurance pool for northern Australia,” Katter said.
"A quarter of the houses in north Queensland are now not insured, but the chances of any houses being blown away is low as all the houses that could be blown away, have been blown away.”
The Australian Competition and Consumer Commission however prefers a direct subsidy scheme.
But the two MPs co-chairing a Senate inquiry into how the Federal Government has addressed the north Queensland situation are currently at odds over the best way to slash insurance premiums.
Labor Senator Murray Watt has characterised the national reinsurance pool as a “hypothetical slogan” with little detail of how it would be implemented.
Nationals Senator Susan McDonald has laid blame at the feet of the Queensland Labor government, claiming it had accepted stamp duty premiums but failed to reinvest in the state’s north.