Climate change and insured loss in the future
Australia’s built environment is heavily exposed to a wide variety of extreme weather perils. If the behaviour of these weather perils changes over future decades (either upwards or downwards in their frequency and/or severity) because of continued anthropogenic warming, resulting insurance losses are highly likely to follow suit. Future change to the built environment (changes in building density, construction standards/codes, building materials) further complicate understanding how this projected change in peril behaviour would impact on the future built environment.
Each weather peril is projected to change quite differently over the coming decades and with significant regional variation. Some perils are projected to become significantly more common, for example, bushfires, while others such as cyclones are projected to continue their downward trend in frequency that has been observed since the 1980s.
This complexity in projections adds further uncertainty to any quantification of financial impacts (even on the existing built environment). Using the current local climate science that is related to extreme weather, we can quantify the projected change in the behaviour of each weather peril (with high uncertainty) and then infer what subsequent financial impacts this projected change is expected to have on the built environment.
It is important to note that the changing behaviour of extreme weather perils is only one component that will drive future damage to the built environment. It is also of great importance to understand how the built environment grows moving forward. Changes to the density of the built environment and gradual improvements made to the building code and building materials are expected to heavily influence the future resilience of the built environment to extreme weather and therefore future insurance loss.
Insured losses caused by some natural hazards can be reduced through improving the resilience of the built environment. As only a proportion of the built environment is exposed to bushfires, floods or cyclones, this ‘at-risk’ proportion can be focussed on for improvement.
Other severe weather perils could impact anywhere throughout the built environment. These perils include severe thunderstorms (hail) and common synoptic storms (low pressure systems). Cost-effective resilience measures remain a real challenge for these perils given most of the built environment would require resilience measures to be taken rather than just a small proportion.
Aon’s global Weather, Climate & Catastrophe Insight: 2020 Annual Report mentions there is some potential for mitigation strategies in Australia to better protect property from hail damage. While some resilience measures are already common in Australia where there is a high exposure (for example, hail nets in motor vehicle dealerships), carrying out widespread resilience measures to the built environment (hail proof roofing across Sydney or Brisbane for example) is unlikely to be cost effective.
Building codes in Australia are focused on life safety and protecting the structural integrity of a building to severe weather, such as cyclonic wind. Building codes are not currently focused on reducing the costs associated with property damage. Moving forward, building codes may become more focused on property resilience to extreme weather which would, over time, lead to a more resilient built environment. Given retrofitting or betterment to meet existing code requirements is only mandatory when a rebuild is required, widespread betterment will take time and most property within the built environment will remain non-code compliant for many years.
Further promoting education and awareness across the community on what specific actions can be taken to improve the resilience of the built environment to extreme weather is needed. The insurance industry is well placed to assist in this area given its focus on understanding risk, the associated costs and what really makes a difference from a resilience perspective.