Mitigation needed to minimise economic impacts of disasters, insurers warn

At the UNSW Institute of Climate Risk & Response (ICCR) Industry Forum on Thursday (23 October), a panel of insurance professionals discussed the challenges posed to the insurance industry by climate change.

Kate Lyons, chief information officer at the Insurance Council of Australia (ICA), warned that a rising trend of under-insurance could negatively impact productivity and economic growth.

“[Insurance] also underpins a lot of businesses and economic development. And without it, if you don't have insurance, there's a high chance that you're actually going to get left behind,” Lyons said.

“When we think about productivity, if we've left a lot of people behind because they can't insure their homes or they can't recover from natural disasters, we're really not [going to drive] the growth of our country.”

The ICA’s 2024–25 Insurance Catastrophe Resilience Report, released earlier this month, warned that Australians were footing the bill for growing disaster costs.

Over the past five years, extreme weather events have cost Australians around $4.5 billion annually. This was a 67 per cent increase on the previous five-year period, the ICA said. Floods were Australia’s most costly and predictable peril, with around 1.36 million Australian properties at risk of flooding.

The government’s first national climate risk assessment (NCRA) warned that households exposed to natural hazards would be highly likely to face increases in insurance premiums in the future, transferring the costs of natural disasters from the insurance sector to individuals and businesses.

“Rising costs and reduced availability of insurance can lead to underinsurance or non-insurance. This transfers the cost of disaster recovery back to householders and governments,” the report found.

“Lack of insurance also reduces the financial capacity to support loans and mortgages and reduces the value of assets.”

Thomas Mortlock, head of climate analytics APAC at Aon, told the ICCR forum that risk mitigation would be necessary to keep insurance premiums affordable.

“I would say that insurance is not there to reduce risk. What it's there for is to redistribute residual risk,” he said.

“That system allows economies to grow despite natural disasters. And so really the only way to break that is by reducing risk.”

Mortlock added that growing climate risk exposure was leading to a ‘catch 22’ in the insurance industry, where growing demand for insurance was driving up prices, rendering it unaffordable for vulnerable households.

“Having a sustainable insurance industry is always a fine line between affordability and profitability, and that's the same in any jurisdiction,” he said.

“But what we're really seeing is this catch 22 whereby climate change in many areas of the world is driving up the frequency of natural disasters, or the underlying hazards associated with them. So therefore, insurance is being needed by particularly vulnerable communities more than perhaps it was 20, 30 years ago.”