Climate change could make it harder and more costly to insure homes

Insurance experts and climate scientists are predicting a rationalisation of the primary insurance market, with some companies going out of business and others withdrawing from areas they no longer believe to be profitable.

In the Australian Coastal Councils Association newsletter for June, Professor Jason Thistlethwaite, a Canadian expert on insurance practice, this is already happening in the United States in regions affected by major climate-related events, such as hurricanes and tornados.

Dr Karl Mallon, director of science at the organisation Climate Risk, says it is also beginning to occur in Australia, where the Insurance Council of Australia has identified ‘red zones of risk’ following the recent severe bushfire emergency.

Risk will rise to about one in 10 properties

‘If we see emissions continuing in the current direction, the level of warming continuing in the same direction, then our risk will rise to about one in 10 properties,’ Dr Mallon told the ABC Radio program Future Tense.

Dr Mallon cites part of the Gold Coast in Queensland, the Central Coast in NSW and West Lakes in South Australia as regions facing an impending crisis.

He cautions against an assumption that governments can simply pick up the role of providing insurance in disaster-prone areas and warned that poorly designed interventions can make things worse. ‘What we have seen in the UK, where there is a flood pool program, is that it’s had the desired effect of protecting the property values of people in flood zones, but as a result there has been a rush of development where people say “well, I can just keep building whatever in these zones”.’

Dr Mallon also points to a recent experience in California, where a moratorium preventing insurers from pulling out of policies in high-fire region ultimately backfired because the companies became reluctant to offer future cover.

Building resilient houses

Dr Mallon says the issue is a planning and building problem, not just an insurance problem in that too many houses continue to be built in areas that are known to be unsafe or will be in the future. The solution, he says, involves a rigorous tightening of building codes and convincing insurance companies that they need to begin calculating their policies on more than the traditional criterion of exposure to risk.

‘Exposure is only half the story,’ he said. ‘The question is – how resilient is the house?

‘If I had a house and I put a burglar alarm in, I get a lower insurance premium. So, if I build a house, it might be in a high-hazard zone, but if I make it more resilient, I should be rewarded for making my assets safer. There are lots of engineering solutions, but we need insurance to reflect that.’

Associate Professor Justine Bell-James, of the School of Law at the University of Queensland, warns that coastal communities face the possibility of a double hit as not only could their houses become uninsurable, but some homeowners could lose their asset to coastal erosion.

She points out that under Australian law any area of private land reclaimed by the sea automatically reverts to the Crown. ‘In those circumstances, unless there is some sort of strategic intervention, landholders will look to government to compensate them,’ she said. ‘That might be through informal disaster relief – the sort of requests that come after a large-scale natural disaster. Or it might be by going to the court and bringing an action against a government in negligence’.

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