Facing the heat: a climate risk perspective from Australia
We may be at the peak of winter in most of Australia, but as temperatures in Europe soar triggering early summer heatwaves and record-breaking temperatures in some locations such as Paris, we are reminded that we face a changing climate. And it's only a matter of months until many Australians face long hot summer days once again – recently I read an article in the Sydney Morning Herald on the need to mitigate 'urban heat' in the Sydney region1.
Looking at the bigger picture discussion, now the Australian Federal election is behind us we need to refocus on where we are heading as a nation regarding climate change, taking into consideration how we work together to mitigate and adapt to the existential nature of climate risk.
As a member of the insurance industry, I'd like to approach this issue threefold: societal impact, the role of the insurance industry, and the response from government and regulators.
According to Swiss Re Institute sigma data, more than 60% of insured losses in 2018 resulted from 'secondary' perils, which are typically weather related (e.g. hail, flood, storm or bushfire).
Climate change is likely to compound the impact of such perils and, as we know, Australia is at the centre of a geographic region adversely affected by climate change.
With increasing population densities, wealth concentration and coastal exposures, communities and their insurers are facing a more constant flow of small and medium-sized catastrophic events. The Sydney hailstorm in December 2018 and the Townsville floods earlier this year are two recent examples.
Bringing in another perspective, much of the research relates to the physical impact of climate change, but as noted in the Swiss Re Institute's 2019 SONAR report, "One risk area that has not, to date, been afforded the same degree of investigation is the impact of climate change on human life and health."
SONAR goes on to note that the pronounced risks from climate change affecting human health stem from heatwaves, floods, droughts, fires and vector-borne diseases. The Black Saturday bushfires of February 2009 claimed 170 lives, while there were 432 heat-associated deaths in Victoria and South Australia from January to February of that year2.
Sadly, with a rise in extreme heat events the research shows that the number of related deaths will also increase dramatically in years to come. The 2016 Australian State of the Environment report estimated that, in 2020 there will be more than 2,000 heat-related deaths in our capital cities alone, rising to 5,000 deaths per annum by 20503.
The long drought across the eastern states of Australia, along with a record hot spring and summer, exacerbated bushfires as well as floods and storms during 2018 and into 2019. Last year was the third warmest year on record and January this year was the hottest month on record, with average temperatures exceeding 30C. The ramifications of such a trend are enormous; and the impact of extreme heat, droughts and floods on agriculture will amplify issues around migration, urbanisation, food security and water scarcity.
Role of the insurance industry
How we respond to climate change – from a product and operational perspective – is undoubtably a key focus for reinsurers and insurers across the world. It's been on Swiss Re's agenda for more than 30 years.
I found the CRO Forum’s paper The heat is on – Insurability and resilience in a changing climate4 particularly relevant. In part, the paper considers “the social role of the insurance industry and its responsibility to support the wider societal effort to transition to a lower carbon world, and to influence civic and infrastructure planning decisions now to help avoid an insurability gap in the decades ahead”.
The insurance industry should not simply be observers of the changing pattern of risk. Measures also need to be taken to respond to long-term climate trends. APRA reported that, “Climate change and our responses to it are now widely recognised as foundational drivers of risk and opportunity with the global economy.”
Alternative insurance products such as parametric solutions that use an index-based trigger on windspeed, rainfall, the burned area or even smoke haze, for example, could assist governments, businesses and individuals to deal with the increased operational costs associated with an expected higher frequency of losses.
Swiss Re is transforming our corporate responsibility statements into concrete business activity. We were one of the first in our sector to switch to ESG benchmarks and today we apply ESG criteria to close to 100% of our investment portfolio. Findings have shown this makes economic sense. In 2016 we stopped investing in companies that generate the share of their revenue from thermal coal and last year, joined others across the industry by announcing a thermal coal policy in relation to our underwriting activities.
The Deputy Governor of the Reserve Bank of Australia recently described climate change as a “systemic risk” to the stability of our economy. He also outlined the greater possibility of two or more climatic events combining to produce an outcome that is worse than the effect of one of them occurring individually.
APRA executive Geoff Summerhayes also noted that climate change debates are particularly sensitive in Australia given the nation's exports of iron ore, coal, natural gas and crude petroleum. He said government spending decisions may need to be reprioritised but the benefits will be “a substantial reduction in the expected catastrophic physical risks of climate change in the long-term".
It is great to see regulators such as APRA and the RBA. industry bodies like the ICA, as well as collaborations like the Australian Sustainable Finance Initiative (which I'm honoured to be a member of), highlighting the importance of climate change and the need to respond. But now more than ever, we need a coherent government policy around how we mitigate and adapt to climate risk, taking account of the root cause of the problems we face.
Our resilience as a nation depends on this.