Monday, October 30, 2023

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Unpacking historic catastrophes: how does it impact the insurance industry today and in the future?

The Insurance Council Australia released new data in their Annual Catastrophe Resilience Report in September, revealing that historic catastrophes would have a greater impact today compared to what they had in the past.

The rising cost of living, driven by high inflation, highlights a pressing issue for the insurance industry and its customers, specifically the affordability and availability of insurance. This article takes a closer look at the new data which help to better understand and prepare for a future where extreme weather events won’t be a mere exception.


Historic catastrophes in a different light

To understand the potential impact of future extreme weather events, we need to compare the financial impact of recent catastrophes with normalised losses of past insurance catastrophes.

In 2022, Australia lodged over 302,000 disaster-related claims over four declared insurance events, costing $7.28 billion. The Northern NSW and South East Queensland floods, known as CAT 221, accounted for $6 billion of these losses. This was the costliest event recorded in Australian history and the second biggest event globally after Florida’s Hurricane Ian, costing $106 billion of insured losses.


Data calculated by Risk Frontiers normalises the losses of past insurance catastrophes to account for inflation, changes in property numbers, construction costs (which rose 12% in 2022 alone) property values, and stricter building codes today. With that in mind, the Sydney Hailstorm of 1999, which caused $1.7 billion in insured losses, would result in an estimated $8.85 billion in insured losses if it happened in 2023. Similarly, Cyclone Tracy, which occurred in 1974 causing $200 million in insured losses, would result in an estimated $7.4 billion in insured losses in 2023. These figures surpass the insured losses from last year's record-breaking flood, which cost $6 billion.


The projected costs for losses in historic catastrophes are higher today because there has been considerable population growth and property development across Australia since the occurrence of these events. More people and properties are at risk in large population centres, increasing the potential impact and cost of insurance losses which in turn will impact insurer profitability and premiums.


Investing in resilience and mitigation measures

The ICA report suggests reforming state taxes on insurance products will alleviate immediate costs for consumers. State taxes such as GST and Stamp Duty are applied to insurer premiums for Australian insurance products and contribute to the affordability issue. These taxes also continue to increase with higher premiums collected during a hardening insurance market.


The data further highlights the need for increased investment in community resilience and long-term infrastructure mitigation measures such as avoiding development in floodplains, implementing home buy-back schemes to relocate people out of danger zones and improving building codes.


From a reinsurance perspective, we see the cost of reinsurance is heavily influenced by global insured losses and local projected loss exposures. The recent introduction of the government’s ARPC Cyclone Pool aims to reduce reinsurance costs associated to cyclone exposure to provide premium relief for consumers.


The path ahead

Despite the lower financial impact of recent insurance catastrophes compared to previous years, the risks associated with worsening extreme weather events persist. The recalculated data clearly shows that future extreme weather events in major population centres will have severe and costly consequences. The findings serve as a wake-up call, highlighting the importance of implementing measures in high-risk communities to actively plan for future loss mitigation.


Rebecca Crowther
Client Manager


Honan Insurance Group Pty Ltd (Honan) (Australian Financial Services Licence no. 246749, ABN 67 005 372 396) is an insurance broker acting as agent for insureds and intending insureds. Honan is not an insurer.  The information in these articles are current as at the date of first publication and have been prepared without taking into account your objectives, financial situation or needs. Any advice provided in these articles is of a general nature only. Any statements concerning tax, accounting or legal matters are based solely on Honan’s experience as an insurance broker and are not to be relied upon as accounting, tax or legal advice. Before making a decision to purchase an insurance policy, please read the relevant Product Disclosure Statement to make sure the policy is right for you.  Insurance cover is subject to policy terms and conditions including policy limits and exclusions.

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