Insurance companies were sold down at the start of trade on the Australian market, with share price falls for the likes of IAG and QBE linked to uncertainty over the exposure to damages from the deadly storms that struck the east coast over the weekend.
So far, insurance companies have received more than 11,000 claims with estimated insured losses of $38 million. Most of it is linked to damage to roofs and gutters, and some flooding of cars – the stuff of typical storm-related claims.
But there was more severe damage in some places, most spectacularly on Sydney’s northern beaches – where you’ll find some of the most expensive real estate in Australia – where houses were torn apart by a swell that inundated the suburbs of Narrabeen and Collaroy.
It is impossible to make any direct connection between climate change and the low pressure system that battered Australia’s east coast over recent days. Those old enough might remember a very similar storm in 1974, which swept away the walkway between Manly’s aquarium and the nearby ferry terminal.
And the houses damaged north of Sydney are built right on the beach so their owners were always taking something of a risk.
But the damage is an illustration of the kinds of impact likely from the weather events that climate change is expected to make more frequent.
Recently-published research from the Climate Institute shows the value of housing stock around Australia exposed to extreme events could be in the region of $90 billion, with significant potential implications for the insurance and banking sectors.
The institute last week published a discussion paper titled “There goes the neighbourhood: Climate change, Australian housing and the financial sector” which looked at the risks to Australia’s property stock, including the potential exposure of banks and insurance companies, from extreme weather events. It warned that “continuing gaps in policy, regulations and industry” made it “highly likely that some of this new stock is more vulnerable than buyers, residents and other stakeholders would assume.”
The research paper notes:
Homes are being built, bought and sold in locations with exposure to weather and climate-related risks, particularly flood, storm surge, rising sea levels and coastal erosion. As the climate changes due to human activity, these risks will be exacerbated.
The aggregate exposure of the Australian housing stock is likely to be worsening as housing continues to be built with no requirement to consider climate change.
This does not mean all these houses will be rendered uninhabitable. Well before becoming uninhabitable – and even without suffering any damage – some housing will become so risky as to be “uninsurable”, with premiums reaching an extremely high level or simply not being offered at all, as insurers deem the risk is unacceptably high. Even a house that is never actually damaged can be subject to very high premiums if the risk of costly damage is high.
Kate MacKenzie, investment and governance manager at The Climate Institute and the lead author on the report, said the research found that “problems exist with residential housing exposure to even historical levels of risk — and climate change will make that worse”.
There were rumours today that Collaroy and Narrabeen properties have notoriously difficult to sell and insure because of the storm risk. The Climate Institute paper highlights how similarly-challenged property pockets could become increasingly widespread, requiring policy responses from both government and affected businesses.
“Banks and other lenders will insist that mortgagors have home insurance when the loan is issued; but that only covers the first year of their mortgage; generally it is not checked in subsequent years. Under-insurance is known to be widespread,” MacKenzie told Business Insider.
“Homeowners will often turn to their insurance, but some hazards are generally not covered by home insurance. Actions of the sea, for example, are typically excluded. Who should bear the cost of repairing this damage? Should fellow ratepayers be funding protective measures such as seawalls and groynes?
“If mortgages are outstanding on these properties, will it result in impairment to the loan? Were banks and their regulators aware of the risks? Were these houses valued appropriately at the point of sale, considering this risk?”
Previous research based on 2008 Australian property prices assessed the value of stock at risk from climate change at around $63 billion. The Climate Institute paper estimates the current value, based on the increase in Australian housing stock and the lift in the property market, would be around $88 billion in 2015 prices, although it believes this is a conservative figure.
This is because the risk assessment model “does not include riverine flooding, or indeed any other natural perils such as bushfire or heatwaves which may damage homes now or in the future”, according to one of the appendices to the research paper. It also “does not include localised storm surge modelling for some states (notably, Queensland)”.
“The report also does not incorporate seawalls and levees, which may reduce the value at risk estimates, but is unlikely to be enough to offset the other factors listed here,” the authors wrote.
You can see the full discussion paper here.
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