Having to respond to numerous natural disasters in the past three years, the Australian insurance industry is hurting — and stakeholders are keen to know how the sector will achieve its net zero goals. 

    Climate change is creating an insurance crisis in Australia. An average rise in the global temperature of 1.44oC over pre-industrial levels has already increased the frequency and intensity of extreme weather events, driving up both the number of claims and the cost of premiums.

    “Insurance is the bellwether for climate impacts in Australia across a range of sectors, and rising temperatures are having an impact on the availability and affordability of insurance in this country,” says Andrew Hall, executive director and CEO of the Insurance Council of Australia (ICA).

    “Insurers are highly motivated to achieve net zero carbon emissions for the sake of their customers and their businesses. Extreme weather events, such as cyclone, flood and bushfire, are taking a massive toll on the communities exposed to them and also the profitability of our sector.”

    A threat to the insurance industry is a threat to the economy. General insurers employ about 60,000 people, provide protection for 30 million homes, buildings and vehicles and, every year, pay out $36.5b in claims. Insurers also source capital and reinsurance outside Australia. As a result, stakeholders — ranging from global reinsurers and investors to regulators and local customers — are asking insurers how they plan to support the transition to net zero.

    Members of the ICA write approximately 90 per cent of policies in the general insurance sector and, according to Hall, most are keen to play an active role. “We’re already seeing a lot of very positive actions and good intentions, but our industry is very diverse,” he says. “Some companies are very well resourced and have clear strategies and goals, others are looking for guidance, which we are keen to provide. We were impressed by the climate roadmap our counterpart organisation in the UK created for their members and we were able to leverage some of their work to develop a climate roadmap appropriate for Australia. Our aim is to reinforce and support the work insurers and reinsurers are already doing as we help them to create the most effective, structured pathway to net zero.”

    Suncorp CEO of insurance product and portfolio Lisa Harrison GAICD believes the net zero transition can only be achieved through this level of collaboration. “The ICA Climate Change Roadmap is the insurance industry’s signal that we’re determined to play our part in enabling the transition of our economy towards net zero,” she says. “This is simply not a task any one insurer can accomplish on its own. We look forward to collaborating with the ICA, our fellow insurers, our customers and suppliers, as well as the federal and state governments, as we navigate this complex task ahead of us.”

    Sue Houghton, CEO at QBE Australia Pacific and a director of ICA, believes the sector has an important role to play in fostering an orderly and inclusive transition to a net zero economy.

    Fellow ICA board member Hugo Schreuder, CEO of Youi, says he’s proud to be a signatory of the roadmap. “We recognise that climate change poses a serious threat to the physical and financial wellbeing of the Australian population,” he says. “As a responsible insurer, we are happy to play our part in contributing to solutions to this threat.”

    A five-pillar approach

    The UN has warned that if we are to limit warming to the 1.5oC set out in the Paris Agreement, global greenhouse gas emissions must reach their peak before 2025. They must then decline by 43 per cent by 2030 and reach net zero by 2050. There are good reasons for these targets. In a study published in Nature Climate Change, an international team of scientists predicts that a rise above 1.5oC, even for a short time, could trigger a cascade of tipping points that would exacerbate further warming by inflicting irreversible change on the global climate system.

    The ICA is encouraging members to set interim targets consistent with a 1.5oC net zero transition pathway — with a target date no later than 2030. It wants insurers to focus on making a substantial reduction in emissions this decade and apply best- practice methodologies from initiatives such as the UN-convened net zero alliances.

    The Climate Change Roadmap presents possible pathways based on the following five pillars:

    1. The insurance industry’s net zero commitment
    2. Net zero industry operations
    3. Net zero with insurers’ customers
    4. Net zero investments
    5. Creating a more resilient Australia.

    The roadmap allows for the diversity of the insurance industry. “We have 52 members, all with their own unique challenges,” says Hall, “so we’re encouraging them to use the roadmap as a basis for creating their own net zero strategy. We also see this as a living document, which we’ll continue to update as the science evolves.”

    While members aren’t bound by the roadmap, Hall predicts that stakeholders will find it a valuable tool for measuring a company’s progress. “In that way, the roadmap will bring the discipline that’s really important in this space,” he says.

    “The roadmap aligns with, and is consistent with, the global initiatives in which Allianz is participating,” says Richard Feledy, managing director of Allianz Australia Limited and a director of the ICA. “It provides the local industry with a best- practice framework to help insurers reach their net zero targets and can also enable Australian insurers to put in place local taxonomies, methodologies and processes to reflect the particular characteristics of the Australian economy and environment.”

    Insurers’ wide-ranging impact

    The roadmap’s five-pillar structure sets out the various ways insurers can contribute to net zero. As with any other organisation, there are opportunities to reduce the emissions produced in the course of doing business — both directly in the form of, for example, heating and cooling, and indirectly through procurement and the supply chain. Insurers also provide a backstop for uncertainty in development and investment by pricing and underwriting risk.

    “What we underwrite matters,” says Hall. “If you can’t insure a project then you’re unlikely to obtain finance.”

    As the energy market shifts, new forms of energy generation will need to be insured. “Investing in the clean energy transition will become increasingly important,” says Hall. “This includes supporting the development of renewable infrastructure as well as upskilling in our industry so we’re able to underwrite a range of new energy technology.”

    Insurers are developing increasingly sophisticated risk modelling and assessment for underwriting and pricing climate risk. As a result, carbon intensive industries are facing far more scrutiny. Hall advises companies with a significant amount of carbon exposure to act quickly to work out how their transition to lower emissions will look — and how best to communicate that.

    “We’re conscious that the commitment is to net zero, not actual zero, so moving forward, some insurers will continue to work in the energy space that involves coal and gas,” says Hall. “These elements will remain in place for some time.”

    With approximately $80b in invested assets globally, Australia’s general insurers can also exert considerable influence outside their own industry.

    “Insurers hold large reserves of capital against current and future policy commitments and insurance claims,” says Feledy. “Allianz strategically invests in low-carbon assets and is a major investor in renewable energy, particularly in Europe, certified green buildings and green bonds — and in companies important to the transition to a non-fossil fuel energy future, like hydrogen technology.” One example is the Allianz Group’s investment in the Emerging Market Climate Action Fund (EMCAF). “We’re providing early-stage equity financing to climate mitigation and adaptation, as well as environmental projects in emerging and developing markets, by backing fund managers and project developers active in these markets,” says Feledy. “EMCAF was initiated jointly by Allianz Global Investors and the European Investment Bank, and has been endorsed by the G7 as an innovative blended finance fund for mobilising private investments for climate- relevant infrastructure. This demonstrates how an organisation with global scale and reach can play a positive role in the transition to a low-carbon economy.”

    The ICA is bringing the “E” in the ESG of investment principles to the forefront in a bid to ensure that insurers’ portfolios are well balanced across all sectors. “Where possible, preference is given to sectors that make a positive contribution — or, at least, aren’t detrimental — to achieving net zero,” says Hall. “It would be very counterproductive for insurers to invest in sectors that may be driving the negative climate outcome that is damaging the industry’s bottom line.”

    Threats to insurability and socio-economic equity

    The floods in February and March last year were the costliest natural disaster in Australian history. “Nearly $6b in claims have now been made relating directly to this — and that’s on top of the year’s normal claims,” says Hall.

    If they are to remain profitable, insurers must be able to absorb costs on this scale. “To do this, they need business models to finance expected and unexpected shocks to ensure they meet their obligations to individuals who have claims because of the shocks,” says Michael Sherris, professor in the School of Risk and Actuarial Studies at UNSW Business School. “But unfortunately, it’s the individuals purchasing the insurance who will have to pay for the impact.”

    In the green paper, Home insurance affordability and socioeconomic equity in a changing climate, the Actuaries Institute notes that households already struggling to pay home insurance premiums will suffer most from the impacts of climate change.

    “Since the Black Summer of 2019—20, the ICA has declared 13 insurance catastrophes,” says Feledy. “Australian insurers received over $13b in claims over the two years to May 2022. This is having an impact on the affordability of property insurance for property owners who are highly vulnerable to extreme weather events, particularly flood, cyclone and bushfire.”

    In July last year, the federal government implemented a Cyclone Reinsurance Pool designed to reduce the high cost of home insurance in cyclone-prone areas, particularly in northern Australia. Backed by a $10b government guarantee, the pool is an arrangement between reinsurers and the Australian Pool Reinsurance Corporation. It covers household, strata and small business property insurance policies.

    “Allianz was an early and strong advocate of a government-backed reinsurance facility to help address the affordability concerns of property owners vulnerable to cyclone and a high flood risk,” says Feledy.

    “However, the pool only covers damage from cyclone and cyclone-related flooding. As a result, it provided no assistance with the affordability of flood insurance for any of the property owners impacted by last year’s floods, as these were not related to a cyclone. We consider this to be a gap in coverage and support the extension of the pool to cover all houses with a high flood risk. We would also like to see a government subsidy that would enable the pool to make a meaningful impact on the affordability of insurance for all Australian property owners with high cyclone and flood risks.”

    ICA and its members have been promoting reforms to land use planning, zoning and building standards, as well as government investment in mitigation, resilience and adaptation. ICA is also a member of the federal government’s Hazards Insurance Partnership, which is drawing on insurance industry expertise to assist government considerations on these issues.

    “The Hazards Insurance Partnership is part of a commitment to spend up to $200m on resilience mitigation funding at the Commonwealth level, which will be matched by states and territories year on year,” says Hall. “This will save money in the long term because, when homes are built to be more resilient and in places carrying a lower risk, they remain insurable.”

    Even with the best of intentions, the milestones outlined in the roadmap can only be achieved with the support of strong emissions-reduction policies at the local, state and federal levels. Along with creating the roadmap, the ICA has committed to advocating on behalf of its members for government policy settings that will enable Australia’s transition to net zero in line with the Paris Agreement.

    This article first appeared under the headline 'Under The Pump’ in the September 2023 issue of Company Director magazine.

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