Snapshot
- Aon’s climate specialists advise there are many factors that contribute to bushfire losses in Australia, and the impact on insurance, and reinsurance, may not be as expected.
Media headlines are insistent: Australia is facing an especially severe bushfire season this summer, compounded by fuel growth fed by the now faded La Niña, and increasing hot, dry weather thanks to El Niño.
However, Aon’s climate specialists are warning that it’s not that cut and dried; many factors contribute to bushfire losses, and the impact on insurance, and reinsurance, may not be as expected.
Aon’s Climate Risk Advisory Lead, Dr Tom Mortlock, says a lot of ingredients go into making a big bushfire. “El Niño is one of them, but it’s certainly not everything. If we look back to 2019/20 – obviously a bad bushfire season – we weren’t in El Niño then. The Indian Ocean Dipole, and a few other climate indices, all aligned to make dangerous bushfire weather conditions.”
“We have regional climate drivers, but they really just influence the background conditions that are conducive for bushfires to get out of control. In Australia, bushfire ignitions are about 50% human caused and 50% lightning strikes, so nothing to do with regional climate drivers at all. The ignition is, to a certain extent, random. It’s important to make that distinction,” Dr Mortlock says.
“Also, in 2019/20 we still needed a wildcard to occur during the spring, and that wildcard was sudden stratospheric warming – the landscape dried out very suddenly which set things up to be a bad bushfire summer,” Dr Mortlock continues. “We haven’t had that this spring – in fact that sudden stratospheric warming phenomena is actually quite rare in the southern hemisphere, and research by our partners at the Climate Change Research Centre at UNSW suggest that with climate change, it will actually become rarer.”
From an insurance perspective, Dr Mortlock says that normalisation of loss data from the Insurance Council of Australia shows that trends in disaster losses through time have a lot more to do with where we choose to live rather than the changes occurring in the climate.
“That is not to say that climate change is not happening – it most certainly is. But a loss record is the last place you’d look for evidence of this because insurance losses are a conflation of hazard, exposure, and vulnerability. Loss records are also typically short with high year-on-year variability and some studies from the US have shown that because of this, it would take hundreds of years of loss data for a significant climate change signal to come through,” Dr Mortlock says.
“However, what we do see is that loss volatility in Australia is still very sensitive to year-on-year climate variability. Larger loss years occur during La Niña periods. A lot of exposure in Australia is on the east coast and vulnerable to what is happening in the Pacific, and La Niña is a Pacific phenomenon and on average we see more floods and cyclones during periods of La Niña,” he explains.
“The correlation between losses and El Niño is not as strong, but we do tend to see lower loss years during periods of El Niño,” Dr Mortlock continues. “This is because there are less flood and cyclone losses but not necessarily more bushfire losses.”
Aon insights revealed that El Niño leads to loss years that are 35% below the long-term average and that less than half (~45%) of all bushfire losses have occurred during El Niño years. In fact, bushfire losses account for less than 12% of catastrophe losses in Australia, mainly because population is metro-centric in Australia.[1]
Aon data also shows that across the nation, only 11% of property lies in bushfire prone areas (i.e., within 100 metres of bush), with this number highest in Western Australia (23%) and lowest in Victoria (3%). However, the actual loss is highly dependent on the fire footprint, and historical data shows that insured losses from individual bushfire events are typically much lower than they are for “wet” perils.[2]
Head of APAC Analytics, Reinsurance Solutions at Aon, Peter Cheesman, gives a reminder that climate change is more of a trend than an event, so impacts will result in gradual movements in current averages instead of quick, significant shifts.
“The level of uncertainty when predicting losses for large, infrequent events is very complex, and this uncertainty is further compounded by the impact of climate change. Regardless, all businesses should include natural catastrophe analytics as part of their business plan, not only at a physical and transitional level on their own business, but also that of their clients and suppliers,” Cheesman says.
The insurance industry also needs to have greater involvement when it comes to planning and development at a community level, especially when recovering from a natural event such as floods or bushfires. Cheesman explains, “As a key stakeholder in the livelihood of the community and economic development of the region, insurers can provide insights into future climate scenarios and help build resilience. What we’re seeing from a lot of our clients is that bushfire is not a material reinsurance peril – it’s not pushing through a lot of retentions, which are larger now, and not getting up to that level where insurers need to call on their reinsurers.”
Cheesman continues, “Although there may be a global perception that Australia is very bushfire prone – and it’s certainly a big deal from an economic, health and safety, and environmental perspective – from an insurance industry perspective bushfires tend not to be as much of a loss driver when compared to floods and cyclones or frequency events such as storms.”
[1] Aon, 2022, Understanding Climate Phenomena: El Niño-Southern Oscillation and the Indian Ocean Dipole
[2] ICA, 2023. Historical Normalised Catastrophe Losses, October 2023. Data hub – Insurance Council of Australia
