This article was originally published on my LinkedIn profile.
I’ve seen plenty of coverage of the recent Climate Council report on the likely increase in bushfire losses. But in reality these growing costs could be far higher and even more unequally distributed.
The figures for economic losses are based primarily around insured losses (which in economic terms aren’t really a loss, assuming that the bushfire risk has been priced correctly), and this assumes that in the future most properties will still be insured against bushfire. But the larger conflagrations brought on by climate change as well as the closer coupling of disaster events (the longer fire seasons will make it more likely that multiple large bushfire disasters happen in any one year) will increase the costs for insurers and make it more likely that any one bushfire season could bankrupt them. In theory, the larger the loss in the worst case scenario, the higher premiums need to be in order for insurance companies to remain solvent. In practice, insurance companies push up premiums after large disaster events, even for different hazards. Together these mean that as climate change increases bushfire risk, in particular the risk of catastrophic outcomes, insurers will charge ever higher premiums and some may withdraw from the market entirely. This will lead to far fewer people being covered when a bushfire disaster strikes, with the government and charities being left to pick up the slack.
Perhaps it’s time then that the Federal Government revisited the idea of a national disaster insurance scheme – to ensure that future generations can meet the costs of these disasters.
It is true that the cost of disasters are going up but the big expenses are in storms and floods. My understanding is that bushfire is not a major issue for insurers in part because they can spread the risk over so many policy holders and there are more homes lost to urban fire than bush fire (but that doesn’t take into account loss of pasture, livestock, fences etc). Even so I understand Black Saturday didn’t make it into the top 10 of Australian disasters in terms of insured losses.
My question is ‘Given the spread of risk and re-insurance is there any data or evidence to support a proposition that ‘one bushfire season could bankrupt them’ or that insurers believe the cost of bushfire (as opposed to disasters more generally) is such that they will not be able to offer cover in the future?’
You’re right that bushfires are small fry compared to the losses associated with storm and flood, and that losses for any one fire are relatively small compared to the total number of properties at high risk of bushfire. Given those two points, it’s likely that flood or even storm would become uninsurable long before fire would. Because all the dollars around the provision of bushfire insurance are rolled into standard home and contents insurance it’s not really possible for those outside of the industry to run the math on the future insurability of bushfire. As such articles like mine remain mostly speculation.