Extreme Weather Events Create Opportunities for Collaboration and Innovation 

In a year when many weather records were broken – damage from global natural disasters in 2023 totaled USD$380 billion in economic losses and USD$118 billion in insured losses, with economic losses 22 percent above the 21st century average.[1]

New Zealand was particularly and significantly affected, especially when per capita calculations are taken into account, highlighting the threat catastrophe risk poses to the Pacific region and the need for better preparedness and planning to reduce risk, protect lives and increase resilience for the future.

2023 saw New Zealand take two flood driven hits in quick succession: in late January widespread flooding in Auckland resulted in USD$3.4 billion of economic loss and USD$1.3 billion of insured loss. Then, only a few weeks later, Cyclone Gabrielle caused USD$3.9 billion in economic loss and USD$1 billion in insured loss. Together the events resulted in 15 fatalities.[2]

These two 2023 events are now the top two costliest weather-related events for the New Zealand insurance sector on record, on an inflation-adjusted basis. Prior to these events, the largest weather-related loss since the 1960s was the Timaru hailstorm (2019) that generated USD$122 million of insured loss in current dollars. The two 2023 events have therefore completely eclipsed prior loss experience. While the two events resulted in catastrophic impacts, it would be erroneous to treat Cyclone Gabrielle in particular, as ‘unforeseen’ given cyclones Bola (1988), Giselle (1968) and an unnamed cyclone (1936) would all have delivered catastrophic impacts if they occurred today.

Australia also suffered across 2023. Economic losses of USD$865 million came mainly as a result of widespread flooding in North Queensland after the impact of Cyclone Jasper at the end of the year, and the Christmas storms that impacted eastern Australia which led to more than 70,000 claims. The Newcastle hailstorm in May also contributed significantly.

New Zealand’s statistics are particularly notable when you consider the local population and number of people contributing towards the insurance pool. With a population of just over five million the significance of New Zealand’s loss events becomes clear. The equivalent impact on Australia would be a USD$16-19 billon insured loss year.

Collaboration is essential to developing effective solutions
Unsurprisingly, the cost of insuring property in flood-prone areas in both countries is under greater scrutiny. This is particularly so in New Zealand where risk-based pricing for weather perils has been limited prior to these events. This heightened focus also creates an opportunity for closer cooperation between public and private organisations about where and how property is permitted to be built, identification of high-risk areas against a backdrop of climate change, and the creation and development of adequate mitigation practices including business continuity and community resilience. Balancing the urgency of adaption with thoughtful community consultation and collective decision making will be the key to moving forward.

In North Queensland, Cyclone Jasper brought about the first use of Australia’s cyclone reinsurance pool, but over 80 percent of the losses fell outside the coverage of the pool as the resulting flooding was after the 48-hour limit once the event was downgraded. A further cyclone, Kirrily, followed shortly after with limited impacts.

In New Zealand there were over 55,000 insurance claims as a result of Cyclone Gabrielle.[3] Behind that claims figure it is important to recognise that there are entire communities of displaced families and interrupted businesses; there is potential for the government, business and insurance sector to come together, share learnings and strategise ways to reduce the overall impact of these types of events.

The insurance industry also has a role to play in supporting moves to address climate change by influencing how decisions are made around sustainability and the transition toward net-zero carbon emissions. At a household level, insurers could become more innovative, rewarding those who use sustainable materials, minimise fossil fuel energy sources or store water for bushfire protection. Insurers also have an opportunity to diversify their product and service offerings to meet the changing needs of organisations embracing the principles of the circular economy – maximising material use through recycling/refurbishing, and reducing waste, pollution and the use of natural resources.

What is the outlook for 2024?

Australia

Long-term climate outlooks suggest drier than normal conditions into winter, particularly in the north, but above average temperatures are suggested everywhere.

However, reduced total rainfall does not necessarily translate to reduced extreme weather events and their impacts. While El Niño conditions typically bring overall reduced impacts from severe storms and floods, we’ve seen multiple cyclones and storms this summer under El Niño conditions. We are now past the peak of these conditions and will likely be back under neutral conditions in towards mid-2023.

As we head into autumn and winter months, the threat of damaging east coast lows to Australia’s eastern coastline become more important.

New Zealand

Similar to Australia, long-term climate outlooks also suggest that drier than normal conditions are expected into winter (except for the west coast), together with above average temperatures.

Below average river flows (and subsequent flooding) are expected, together with continued elevated fire weather (and bushfire risk), particularly through the South Island. The current Port Hills fires surrounding Christchurch are evidence of these increased fire weather conditions.

Predictive analytics unlock the capability to price future risk
As more organisations are beginning to work on climate-related disclosures, early adopters are currently benefitting the most. It is not just a compliance exercise; climate modelling and risk assessments can result in a much better understanding of protection gaps and associated insurance solutions. It is also important for organisations to understand their risk tolerance, for example, does the asset portfolio need to be reconfigured or is more granular data required to more accurately assess current and future flood or bushfire exposure?

Findings in Aon’s 2024 Climate and Catastrophe Insight report emphasise that we are still learning the level of complexity and sensitivity of the interactions between the El Niño Southern Oscillation (ENSO) and other short-term climate cycles. Using historical data to identify near-term risk has evolved to include the use of predictive analytics to quantify how climate change affects the frequency and severity of rare, but costly events. Climate analytics can provide forward-looking diagnostics for a range of scenarios, such as assisting a company to understand the risks at each specific location of their business.

Innovation is key to accelerating the path to net zero
The insurance industry plays a key role in supporting individuals, businesses and governments to adapt to, and mitigate the impact of, climate change and enabling the transition to net zero. Aon estimates that USD$150 trillion in capital is needed over the next 30 years to decarbonise and integrate sustainable practices, however where capital is not protected or where returns are less certain there is hesitation. Through innovative risk transfer initiatives, the insurance industry can help to unlock the potential of green investments.

Global economic losses from natural disasters in 2023 were well above the average for the 21^st century. While the climate may be increasingly unpredictable, it does present an opportunity to take a more holistic approach to building resilience through preparedness.

To learn more, download Aon’s 2024 Climate and Catastrophe Insight Report.

[1] Aon, 2024 Climate and Catastrophe Insight, www.aon.com/en/insights/reports/climate-and-catastrophe-report

[2] Aon, 2024 Climate and Catastrophe Insight, www.aon.com/en/insights/reports/climate-and-catastrophe-report

[3] Insurance Council of New Zealand, 2023, www.icnz.org.nz/industry/media-releases/insurers-fully-settled-87-gabrielle-and-auckland-anniversary-claims/