How Climate Change is Impacting Your Home Insurance Premium

10 November 2016

Australia has ratified the Paris Agreement on climate change. With 2016 shaping to be the hottest year on record – following 2015 which was also officially confirmed as the hottest year on record, it’s a timely decision. And it’s also timely to consider the possible effect of climate change on your home and contents insurance policy and cost.

The US-based National Oceanic and Atmospheric Administration has confirmed that 2015 saw the global average temperature climbing to 0.90°C above the 20th-century average of 13.9°C. The record has been confirmed by the UK Met Office.It follows sharply on the heels of the number one warmest year on record, which was 2014. And 2016 is heading the same way.

For Australia, according to the Bureau of Meteorology (BOM) 2015 was our fifth-warmest year on record, with the annual national mean temperature 0.83 °C above average. 2016 has seen a raft of climate-related records broken.

It is therefore timely that Australia has ratified the Paris Agreement on climate change. In announcing the ratification, Prime Minister, Malcolm Turnbull stated the following:

“We join more than 100 other countries in ratifying the Paris Agreement, which entered in to force, as you know, on the 4th of November. Each early entry in to force is a path, a signal, of nations intentions to follow through on their Paris commitments.

“Almost a year from the Paris Conference, it is clear the agreement was a watershed, a turning point. The adoption of a comprehensive strategy has galvanised the international community and spurred on global action. As you know, we are playing our part with ambitious targets. We are on track to meet and indeed beat our 2020 targets. We will review our climate and energy policies next year to ensure that we meet, as we believe we will and are committed to do, to meet our 2030 targets under the agreement.”

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How might these record-breaking years affect the cost of your home and contents insurance?

The general insurance industry has been attempting to quantify the issue of climate change for at least 15 years.

“The role of insurance in underwriting weather-related risk is an important component of the national economy. Any reduction in the industry’s ability to underwrite weather-related risk will have serious ramifications for the economies of those vulnerable regions where climate and weather risk is greatest.”

(Insurance Australia Group, ‘The Impact of Climate Change on Insurance against Catastrophes’, 2002)

In June 2014, a report prepared by independent analysts Climate Risk concluded that based on the high-end of climate projections, an average home insurance premium could rise by 92% over the life of a standard 30-year mortgage; while the impact of climate change on insurability could lead to property value reductions of 20% or more over the life of a standard 30-year mortgage. Certainly Canstar’s recent analysis of landlord insurance policies found average premiums for $300,000 of building insurance and $25,000 of contents insurance to be more than 2.5 times more expensive in North Queensland as compared to Brisbane. Climate risk is a factor in this differential. Cheap home insurance could be a thing of the past!


Why does climate impact my premiums?

According to the Insurance Council of Australia, a significant portion of the premium for home and contents policies is made up of exposure to natural hazards at an individual risk level, as well as common domestic risks such as house fires and burst pipes. Another key driver of premiums, though, is the impact of catastrophes on communities and the cost of reinsurance following a global reassessment of Australia?s risk by global reinsurers. With the release of the Intergovernmental Panel on Climate Change’s Fifth Assessment Report indicating that heatwaves and other extreme weather events are likely to increase, are home and contents premiums likely to rise further?

The answer over time is almost certainly “yes” and according to research by reinsurance giant Swiss Re, natural disasters cost the global insurance industry around US$77 billion in 2012. The real economic and human cost was much higher, of course, as many people and locations generally are largely uninsured.


The impact of urbanisation

According to Swiss Re’s “Mind the Risk” report, a significant contributor to the consequences of climate change is our rapid global urbanization. “Rapid growth that outpaces planning, flaws in zoning laws and construction failures can all exacerbate the risk of natural hazards to urban communities,” observes the report. “When an event does occur in such circumstances, it drives up the costs for disaster recovery and increases the burden on public budgets.”

Of course, prices can only rise to a point at which owners cannot afford the cover – and perhaps this is where the impetus for real action on climate change will occur. Or, as Swiss Re concisely puts it: “insurance puts a price tag on risk and incentivizes investments in prevention measures.”

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