As we watch the horror of the Los Angeles fires, Australians are painfully reminded of their own vulnerability to climate change, which continues to exacerbate the impact and frequency of these unnatural disasters.
The images of loss and destruction in LA are particularly painful to those who have experienced such losses firsthand in Australia.
However, that vulnerability has another dimension that has been brought to light by LA’s story, as a tale unfolds of those who were unable to renew their insurance coverage — at any price — as well as the potential failure of a last-resort government insurance scheme.
Even before Australia’s cost-of-living crisis, a combination of extreme fires and floods has left many households keenly aware of the high cost of home insurance and, in an increasing number of cases, the lack of insurance affordability altogether. Many insurance companies would deny that they have withdrawn from covering specific disaster risks in specific areas, but the anecdotal evidence is mounting.
A 2022 Climate Council report said that 4 percent of homes across the country would be uninsurable by 2030. In the most vulnerable regions, such as Shepparton in Victoria, that figure rose to 90 percent of properties.
Insurance costs in Australia rose 28 percent between March 2022 and September last year. The rapid rise is due to a combination of factors, including construction costs, and the effect of climate change is key.
We live in a world of insufficient action on global warming. Last year, records showed it the warmest year yet, reaching the unwanted record of 1.55°C of warming, the UN’s effective line-in-the-sand for temperature rise. Not coincidentally, last year was also the third most costly year on record for unnatural disasters, with a price tag of A$230 billion (US$143.56 billion) in insured losses alone.
There is a clear pattern here of rising global temperatures, rising severity and frequency of disasters, and rising insurance costs. In practical terms, insurers would continue to increase premiums — and not just in high-risk areas — to cover their increasing reinsurance costs and rising claim numbers.
As we are seeing in California, trying to cap premium increases, or asking the public sector to step in, is not a workable solution, at least not on a permanent basis. No rational business would take on that level of risk and government-run schemes would ultimately place enormous pressure on the budget and, ultimately, taxpayers. Yet each time premiums jump off the back of yet another disaster, there are loud cries that this is exactly what the insurance sector and government in Australia should do.
Unfortunately, this is a case of shooting the messenger. Indeed, the Australian Productivity Commission has warned that the government should not yield to the temptation to try to cover the warning signals given by rising insurance premiums. To do so would result in large economic and societal costs.
With the outlook for risk of fire, flood and other disasters increasing, this is not a problem that will go away. So, is there a solution?
First, we need to invest far more in adaptation and resilience. This might be at a community level, through river levees or fire breaks, or at the individual building level, through better design and materials. There is likely to be a strong economic case for government supports for such measures.
However, in some cases, where risks are too high, relocation might be the only option. Such a step comes with enormous economic and social costs but it is one Australia has already implemented through buy-back schemes.
We also need to plan new urban areas giving greater heed to potential risks. People have built their homes in far too many vulnerable places. We cannot afford to repeat errors of the past. Governments have committed to providing better data to inform developers and would-be residents and this needs to be done with urgency.
Ultimately, there are no magic bullets when it comes to insurance affordability in a world of rising climate risk and disaster, and a potential drama is likely to unfold in Australia as it has in California. If we fail to take strong action on climate now, that drama will only intensify, for ourselves and our children.
Nicki Hutley is an independent economist and councilor with the Climate Council.
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