Climate Change Driving up Aussie Insurance Premiums: Decision Inc. Australia

Decision Inc. Australia analysis of available data show that insurance premiums have increased in line with average rainfall increases for past three years

Insurance sector taking a hit, with profitability falling over the same period

Increased insurance premiums will be around for Australians “for a while yet”, adding to cost-of-living pressures for everyday Australians and additional inflationary headwinds for businesses

Sydney, Australia, September 19, 2022 – Australia has grappled with devastating weather events over the past decade, which could once be called ‘one-in-100-year’ events. Now, as these instances become more regular, Australians are faced not just with the devastation of these events, but additional inflationary pressures due to rising general insurance premiums.

This is according to leading independent data and analytics consultancy Decision Inc. Australia, which has analysed data from the Australian Prudential Regulation Authority (APRA as well as the Bureau of Meteorology (BOM) and found a correlation between an increase in above-average rainfall and an increase in Gross Written Premiums from insurers.

However, the analysis also reveals that paid out insurance premiums have more than doubled over the past three years, and that the general insurance sector has experienced effectively flat profitability over that period, including a year of unprofitability in 2020.

Furthermore, the consultancy believes Australians may be stuck with these inflated costs for some time yet. 

A SHIFTED CLIMATE LEADING TO UNDERDISCUSSED INFLATIONARY IMPACT

Data sourced from the Bureau of Meteorology (BOM) shows rainfall trends since 1980 has polarised between the Northwest and the southern parts of Australia. It reported 2020 as the fourth warmest year on record for Australia despite a La Nina event, and despite the national rainfall total that year a full four per cent above the 1961-1990 average.

That year, parts of South Australia between the Flinders Ranges and Kati Thanda / Lake Eyre, much of northern and eastern Western Australia and much of the Northern Territory received above average or record rainfall, while most of NSW did receive above average rainfall, but in a period soon after the 2019 bushfires.

“The climate has seemingly shifted already, and everything from the relentless flooding seen in Queensland and NSW this year, to the devastating bushfires of 2019 and even pestilence are occurring more regularly and seemingly one after the other,” said Aiden Heke, CEO, Decision Inc. Australia. “The key to businesses and property owners during these times is general insurance – they want the security of knowing that if their property is damaged, they’re financially protected.

“But as climate impacts rise, so too do the premiums.”

Sourcing data from the APRA shows steady growth in Gross Written Premiums for general insurance: the revenues insurers take for their policies. This represents how insured Australian consumers and businesses are across all major insurance categories.

Decision Inc. Australia compared this to a single environmental trend: rainfall data sourced from the BOM and combined this with data on paid insurance claims and insurance sector profitability.

The graph shows that:

• Gross Written Premiums have increased from $8.3 billion in 2019 to $10.4 billion last year with rainfall data tracking in line, increasing from 102,000mm in 2019 to 172,000mm last year.

• However, while Gross Written Premiums have increased, the profitability of the general insurance segment has declined in that time.

• In 2020, the sector lost about $144 million before recovering last year up about $140m. It’s facing another down year this year (currently down about $11m).

• The data show that paid claims have increased from 1,901 in 2017 to 4,801 in 2020 and 4,509 last year.

“You can clearly see a broad correlation with how increases in rainfall are affecting the insurance sector over the past three years,” said Heke. “But there’s a clear reason why premiums are on the rise. While everyday Australians affected by these crises are feeling the pinch, quite clearly so too is the insurance sector.  

“Environmental changes in the form of rainfall are driving up Gross Written Premiums/ Insurer revenues; claims are flat, indicating business are being left without a financial means to recover their businesses; and finally, insurers’ profits are falling, which leads to the price of special risk premiums increasing.  

“This is yet another, yet underdiscussed, driver of inflation and higher living costs for Australians and businesses.” 

STUCK WITH INFLATED PREMIUMS “FOR A WHILE YET”

The Australian Government’s climate bill has been passed, enshrining into law two national greenhouse gas emissions targets: a 43 per cent cut below 2005 levels by 2030, and to net zero by 2050. 

However, Decision inc. Australia notes that these targets are longer-term targets and won’t address the increases required by the insurance industry to remain profitable, nor the consumers and businesses that rely on them in the immediate term.  

“Note the timelines here: eight years in advance, and another 20 after that to reduce emissions,” said Heke. “While this is a great first step to put climate action into law and deliver Australia key targets to achieve in the long term, unfortunately, this means very little in the near term. 

“Many decarbonisation projects already in the works to reduce our reliance on fossil fuels are long-term solutions, and it appears we're on the verge of a ‘triple La Niña’ event this year, which may lead to more above-average rainfall.  

“It means that insurance – along with wages, supply chain delays and rising interest rates – is contributing to massive inflation across Australia. Furthermore, businesses are increasingly exposed to climate risk in the near term as insurance and other factors conspire to drive down profitability.”  

Decision inc. Australia notes, however, that their analysis detailed in the previously cited graph shows that Insurance premium costs will drop when paid out claims decrease. 

“Simply put, the higher the costs and the premium, the less likely companies and consumers are to take up insurance,” said Heke. “They want these costs lowered so they get people to take it up, or otherwise the risk is that people and businesses in at-risk areas roll the dice and avoid insurance altogether.”

Decision Inc. Australia believes that without near term solutions, Australians will need to become accustomed to more regular catastrophic climate events, and therefore become accustomed to the increased costs associated with recovering in the aftermath.

“As we commit to decarbonisation strategies, we will eventually see change,” said Heke. “Our thinking needs to be holistic, short, and long term and comprehensive across the entire decarbonisation lifecycle.

“If we consider the industrial consumers of energy, we need to mature the state of Environment, Social and Governance (ESG) decision making within business.  

“We need businesses to take a stronger stance, understand their emissions and build climate risk into their modelling, and make change at the board level. Major government projects can only do so much; real change can be made at the board level on down.

“In the near term? Sadly, it looks like we’ll be stuck with climate-driven inflated insurance premiums for a while yet.”

About Decision Inc. Australia

Decision Inc. is a leading independent data and analytics consultancy which delivers value from data faster. We serve the Australian community and industry and believe great data and analytics expertise will underpin economic recovery and prosperity. We provide insights and accelerated business improvement capabilities to help our clients in their pursuit of progress.