Expect to pay more for risky lifestyles
But bushfires worry insurers less than cyclones and floods, writes Peter Hannam.
W ith large parts of the country under threat during this bushfire season, it seems counter-intuitive - if not insensitive - to downplay the economic risks.
With both Victoria and NSW declaring total fire bans and with bushfire researchers warning the danger period has barely begun, moves to minimise potential losses might also seem premature.
Still, while the costs of the latest fires are not trivial - 525 claims for $52.5 million for the Tasmanian fires alone - the reality is only a fraction of a typical premium reflecting bushfire risk, according to Karl Sullivan, the general manager policy risk and disaster planning at the Insurance Council of Australia.
"[It's] in the vicinity of less than 2 per cent," Sullivan says. "Internal fires from kitchen fires and things like that rate higher."
The insurance industry does not dismiss the human and financial costs from bushfires.
Victoria's 2009 Black Saturday bushfires killed 173 people and destroyed more than 2000 homes. A report issued this week by Suncorp, one of the country's biggest insurers, noted the blazes cost at least $4 billion. Of that, the federal government spent $468 million on relief and disaster recovery, the state government $269 million and the insurance industry $1.07 billion.
But for the industry, bushfires are another of the major hazards facing Australians and less of a worry to insurers than tropical cyclones and floods.
The reinsurance giant Munich Re says research shows Australia is more exposed than other regions to climate change but fire is not the foremost hazard, according to Ernst Rauch, head of the company's corporate climate centre.
Longer term, "water and precipitation are probably the most significant issues related to climate change, in both directions", he says.
"There are risks from too much water - extreme precipitation amounts and flooding but also sea-level rise and storm surges - and from too little water [drought]".
The searing temperatures across Australia so far this year will stoke concerns that human-induced climate change is triggering increased intensity and frequency of natural disasters.
For now, though, increased financial losses come down to more people building more expensive properties in risk-prone areas - and not more extreme weather events, says Professor John McAneney, the director of Risk Frontiers, an independent research group funded mostly by the insurance industry.
Still, spending money on mitigation, improving land-use planning and strengthening the building codes "will put us in a good place for anything climate change has in store", he says.
Insurance premiums, already a source of anger in many households, will only rise further unless action is taken on all three issues, experts within the industry say. Mitigation, in particular, needs more attention.
"Everybody pays, regardless of whether you live in a high-risk area or not, because we've got to retrieve our costs," says Chris Newlan, Suncorp's head of public policy and corporate affairs. "Mitigation is important to smooth out the obviously upward movements in premiums."
Last year Suncorp decided to send a signal to governments at all levels to invest more to limit flood losses by halting sales of insurance to the outback Queensland towns of Roma and Emerald after three big floods in as many years.
Mark Milliner, the chief executive of personal insurance at Suncorp, says plans to build a levee at Roma had been discussed since 2005, with the cost ranging from $2 million to $10 million - a fraction of the flood damage to the area since.
"Broadly, it's cost $500 million for the government and private sector over those seven years," Milliner says.
Suncorp notes the cost of rescue helicopters during the 2011 floods in and around Roma is estimated to have cost $10 million alone.
The debate over mitigation to reduce bushfire risk is likely to heat up again in coming weeks once the main fire-fighting efforts subside.
McAneney says people living in the bush need to be aware of the risks, as demonstrated in the Victorian towns of Kinglake and Marysville - both largely destroyed in the 2009 Black Saturday blazes.
"Twenty-five per cent of the homes that were destroyed were within one metre of the bush," he says. Such homes couldn't easily be distinguished in aerial photography "from other types of fuel load, i.e., the trees."
About 60 per cent of those destroyed were within 10 metres of the bush, he says, citing information submitted to the 2009 Bushfires Royal Commission.
Examining the data on major bushfires over the decades since the 1920s shows some 14,000 homes across Australia have been destroyed. Clearing land 100 metres from those homes "would have reduced losses by about 85 per cent", he says.
Land-use planning and building codes for floods and cyclones are bigger concerns for insurers than fires. The 2010-11 "summer of disasters" of floods and cyclones for Queensland cost insurers some $3.78 billion, while the federal government's tab is so far about $5.1 billion and the state government's $1.8 billion, according to Suncorp.
Despite the scale of the losses, construction of houses and other structures in flood-risk areas continues, such as in the coastal regions near the NSW-Queensland border.
"We know that the Gold Coast-Tweed Heads area has got severe risk of flooding but the number of dwellings there have increased tenfold," says Andy Cornish, chief executive for IAG's Direct Insurance division.
There is also a lot of development in the Hawkesbury-Nepean Valley to the west and north of Sydney despite a document 15 years ago outlining the risks.
"Around 7000 houses would be inundated, 2000 houses destroyed and 40,000 people evacuated if a flood comparable to the 1867 flood were to recur," Cornish says.
Sullivan says land-use planning has improved in recent decades. "Most of the big property risks we deal with as insurers are what we would call legacy issues" dating from the 1950-70s. "There's not a lot that can be done about those now except mitigation or changing building codes."
Developing good mapping for floods and other disasters is one issue. Getting access to the data, such as flood information, once it has been collected, is another, says McAneney.
"There are some [local councils] that outright refuse to provide it," he says, declining to name them other than to say parts of Queensland have been the most difficult.
"First, they think insurers are scumbags, and second, they believe that if they keep all that secret then insurance premiums won't go up."
Insurers, though, will "assume the worst" if they don't have good information and "premiums will go up more than they have to".
Building codes are perhaps the area where insurers have seen the most progress, with tighter controls on construction in cyclone-prone regions in the wake of cyclone Tracy, which flattened Darwin in 1974.
While national building codes now exist the focus is only the safety of the occupants, the insurance industry complains.
The codes "should include a minimum standard for the durability of the property" to ensure it will be liveable with rebuilding in the wake of extreme events, Sullivan says.
Similarly, the national disaster resilience program that does exist - with a third federal funds, a third from the state and the rest provided in targeted funds for local governments - needs an overhaul and more money. Federal funds are about $20 million or the equivalent of a couple of levees, with the overall program due to end in the middle of the year.
"It's a very difficult system for individual local governments which have a pressing need for mitigation works to navigate through," Sullivan says.
Even with a slew of inquiries in the wake of disasters, the lack of changes at the level of individual behaviour means heightened risks from floods or fire will remain.
For instance, McAneney says spending after the latest Brisbane floods could have done more to reduce the threat from the next event, noting how many affected residents used their insurance pay-outs on general home improvements, such as buying a new kitchen. "Very, very few were planning to flood-proof their house," he says. "They were going to build it back the same as it was before."
The problem is similar in bush-fire prone areas. "People like living close to the bush until there's a fire," he says. "We all pay for it."
Insurers, though, are beginning to price in that differentiated risk "more acutely" - whether from fires, floods, or other hazards - in the form of higher premiums.
"If your neighbour five miles down the road has got no fire risk, I'd expect price discrimination just on that," McAneney says.